The CFPB has filed an amicus brief in Regions Bank v. Legal Outsource PA, a case on appeal to the Eleventh Circuit that involves two important issues under the Equal Credit Opportunity Act (ECOA): whether the ECOA provides a cause of action to loan guarantors and whether a business entity can assert a marital status discrimination claim under the ECOA.

The ECOA defines an “applicant” as someone who “applies to a creditor directly for an extension … of credit, or … indirectly by use of an existing credit plan for an amount exceeding a previously established credit limit.”  In 1985, the Federal Reserve Board amended the Regulation B definition of “applicant” to include a guarantor “[f]or purposes of section 202.7(d)” (as adopted by the CFPB, now Section 1002.7(d)).  Section 1002.7(d) of Regulation B specifies when a creditor may require the signature of a spouse or other person (Additional Signature Rule).

Only a few U.S. Courts of Appeal have addressed whether the ECOA provides a cause of action to guarantors.  The Seventh Circuit, in a 2007 decision, interpreted the ECOA’s plain language in a straightforward manner and found that there was “nothing ambiguous about ‘applicant’ and no way to confuse an applicant with a guarantor.”  The court went on to explain that interpreting the term “applicant” to include guarantors would “open[] vistas of liability that the Congress that enacted [the ECOA] would have been unlikely to accept.”

In mid-2014, two other circuits ruled on the same issue.  The Sixth Circuit, rejecting the Seventh Circuit’s reasoning, found that the ECOA’S  definition of “applicant” was ambiguous and that the Federal Reserve Board’s definition of the same term in Regulation B–modified to expressly include guarantors–was entitled to Chevron deference.  Shortly thereafter, the Eighth Circuit, in Hawkins v. Community Bank of Raymore, came to precisely the same result as the Seventh Circuit.  The Eighth Circuit found it patently clear that “assuming a secondary, contingent liability does not amount to a request for credit,” and thus concluded that guarantors are not “applicants” within the plain meaning of the statutory definition provided in the ECOA.”

Last year, an equally divided U.S. Supreme Court affirmed the Eighth Circuit’s decision in Hawkinsthereby upholding the Eighth Circuit’s ruling that the ECOA does not provide a cause of action to loan guarantors.  The affirmance by a 4-4 vote meant that the Eighth Circuit’s ruling had no precedential effect in any other circuit.  (The CFPB, jointly with the Solicitor General, filed an amicus brief in the Supreme Court supporting the plaintiffs’ position in Hawkins.)

In the Regions Bank case, the Bank made a loan to Legal Outsource, a company owned by Charles Phoenix.  It subsequently made a loan to Periwinkle Partners, a company indirectly owned by Lisa Phoenix, the wife of Charles Phoenix.  Legal Outsource, Charles Phoenix, and Lisa Phoenix guaranteed the loan to Periwinkle Partners.  After Legal Outsource defaulted on its loan, the Bank declared a default on its loan to Periwinkle Partners because, under the terms of that loan, a default on the Bank’s loan to Legal Outsource constituted an event of default on its loan to Periwinkle Partners.

Additional defaults occurred over the the course of more than a year prior to the Bank’s decision to commence suit, including the obligors’ failure to pay ad valorem taxes due on the collateral or provide required financial reports and the transfer of equity interests in Periwinkle Partners to third parties without the Bank’s knowledge or consent.  While under no obligation to do so, the Bank spent over a year attempting to negotiate an out-of-court resolution with the borrower and guarantors, to no avail.

The Bank thereafter sued Periwinkle Partners, Legal Outsource, and Lisa and Charles Phoenix in a Florida federal district court to foreclose on collateral securing its loan to Periwinkle Partners.  All of the defendants asserted counterclaims alleging that the Bank had violated the ECOA’s prohibition against discrimination on the basis of marital status and the Additional Signature Rule.  According to the defendants, the Bank required Charles Phoenix to guarantee the loan to Periwinkle Partners solely because he was married to Lisa Phoenix.

The district court dismissed the counterclaims of Legal Outsource and Lisa and Charles Phoenix “to the extent that defendants are asserting their counterclaims for violation of the ECOA in their capacities as guarantors.”  In dismissing the counterclaims, the district court relied on the Eighth Circuit’s Hawkins decision in which the Eighth Circuit concluded that ”the plain language of the ECOA unmistakably provides that a person is an applicant only if she requests credit.  But a person does not, by executing a guaranty, request credit.”  The Eighth Circuit also ruled that Regulation B’s definition of ”applicant” was not entitled to Chevron deference because the definition contradicted the text’s unambiguous statutory definition.

In a subsequent decision, the district court dismissed the ECOA counterclaim asserted by Periwinkle Partners on the grounds that, although it was an “applicant,” it could not assert an ECOA claim for discrimination based on marital status.  According to the district court, “Periwinkle Partners cannot avail itself of the protections of the Act because it is a company, not an individual, and it cannot have a marital status.”

In its amicus brief filed in support of the defendants, the CFPB argues that:

  • Under the plain text of the ECOA and Regulation B, a company can be an “applicant” protected against discrimination “on the basis…of marital status” because the ECOA does not require the alleged discrimination to “be on the basis of the applicant’s marital status.” (emphasis provided).
  • Under the Regulation B commentary, the ECOA prohibits discrimination based on the characteristics of corporate officers and of “individuals with whom an applicant is affiliated or with whom the applicant associates.”  Because the owner of a company is an officer, affiliate, or associate of the company, an applicant company can bring an ECOA claim “if it suffers discrimination on the basis of its owner’s marital status.”
  • The Regulation B definition of ”applicant” is a reasonable interpretation of the ECOA’s text that is entitled to Chevron deference.

 

The Department of Justice’s Civil Rights Division has issued its annual report to Congress regarding its activities to enforce the ECOA, FHA and SCRA.  The report covers 2016 activities that would have taken place under the Obama Administration.  As a result, although it concludes by noting the role of the DOJ’s “vigorous enforcement of fair lending laws” in expanding credit access, it is unclear how the DOJ will carry out that role under the leadership of Attorney General Jeff Sessions.

The report states that the DOJ opened 18 fair lending investigations in 2016, filed seven fair lending lawsuits of which it settled six, obtaining nearly $37 million in relief.  The six settled cases, which are described in the report, include cases involving alleged mortgage redlining (one from June 2016 and the other from December 2016), alleged discrimination on the basis of national origin in connection with vehicle-secured loans, alleged discrimination on the basis of familial status or disability and source of income, and alleged predatory targeting of minority homeowners.

The report indicates that at the end of 2016, the DOJ had 33 open fair lending investigations, including seven redlining investigations.  It also indicates that in 2016, the DOJ “continued to build its working relationships with the federal banking agencies, [HUD] and the [FTC] to strengthen our individual and collective capabilities to enforce fair lending laws,” and that the DOJ also continues “to seek opportunities to work in partnership with various state attorneys general.”  (We note that the CFPB is not specifically mentioned as one of the agencies with which the DOJ is working to improve collaboration.)

One section of the report is devoted to ECOA and FHA referrals made to the DOJ by other federal agencies.  According to the report, the DOJ received 22 ECOA and FHA referrals in 2016: eight from the CFPB, four from the FDIC, seven from the Fed, one from the OCC, and two from HUD.  The report indicates that the DOJ opened eight investigations based on the 22 referrals and returned 12 to the referring agency for administrative enforcement without opening an investigation.  It also indicates that all but one of the fair lending lawsuits filed by the DOJ in 2016 were based in part on referrals.

The report reviews the factors considered by the DOJ when evaluating referrals, listing the characteristics of a referral that will generally result in its return and those that generally will result in its retention by the DOJ.  According to the report, the same factors apply when the DOJ has conducted an investigation and is deciding whether a lawsuit is warranted.

The report also includes descriptions of four settlements involving alleged SCRA violations.

The Department of Justice has filed an amicus brief in a case pending before the U.S. Court of Appeals for the Second Circuit that presents the question of whether the prohibition on employment discrimination on the basis of sex in Title VII of the Civil Rights Act includes discrimination based on sexual orientation.  In the brief, the DOJ argues that based on Title VII’s plain text and precedent, the prohibition does not encompass sexual orientation discrimination “as a matter of law” and observes that “whether it should do so as matter of policy remains a question for Congress to decide.”

Since at least 2015, the CFPB has signaled that discrimination on the basis of gender identity and sexual orientation might be a focus of fair lending supervision and enforcement.  In a 2016 letter to the organization SAGE (Services & Advocacy for GLBT Elders), Director Cordray described how, in the CFPB’s view, current law provided strong support for the position that the Equal Credit Opportunity Act’s prohibition against discrimination on the basis of “sex” includes discrimination based on gender identity and sexual orientation.  More specifically, Director Cordray referenced Title VII cases and noted that Title VII precedents traditionally guide judicial interpretation of ECOA and Regulation B.

He also discussed Equal Employment Opportunity Commission decisions involving alleged employment-related discrimination on the basis of gender identity and sexual orientation in which “the EEOC has laid out its reasoning about how discrimination on these bases necessarily involves sex-based considerations.”  He deemed the EEOC’s views of what constitutes sex-based discrimination under Title VII “highly relevant to the similar statutory analysis of what it means to discriminate based on ‘sex’ under ECOA.”

The DOJ’s position in the amicus brief is clearly at odds with Director Cordray’s attempt to use Title VII cases to support the CFPB’s position on the scope of the ECOA’s prohibition against discrimination based on sex. The brief also suggests that once the CFPB is under the leadership of a Director appointed by President Trump, it may retreat from any efforts to extend ECOA protections to sexual orientation.  A similar retreat by the EEOC could occur once the majority of EEOC commissioners are Republican appointees.  (Although the EEOC’s Acting Chair was appointed by President Trump, a majority of EEOC commissioners are Democratic appointees. In the Second Circuit case, the EEOC filed an amicus brief on behalf of the employee.  In its amicus brief, the DOJ observed that the “EEOC is not speaking for the United States and its position about the scope of Title VII is entitled to no deference beyond its powers to persuade.”)

Regardless of the CFPB’s position, companies should be mindful of the fact that numerous state laws already prohibit discrimination in credit transactions on the basis of sexual orientation and gender identity.  As a result, companies should continue to consider revising their policies, procedures and fair lending analyses to incorporate discrimination based on sexual orientation.

 

Congressman Emanuel Cleaver, II announced last week that he had launched an investigation into small business financial technology (fintech) lending by sending a letter to the CEOs of several fintech small business lenders.  The letter includes 10 questions and asks for responses to be provided by no later than August 10, 2017.

In the letter, Mr. Cleaver expressed concern that “some FinTech lenders may be trapping small business owners in cycles of debt or charging higher rates to entrepreneurs of color.”  He noted that he is “particularly interested in payday loans for small businesses, also known as ‘merchant cash advance.'”  He observed that “current law does not provide certain protections for small business loans, compared to other consumer laws,” and cited Truth in Lending disclosures given to consumers as an example of such difference.  He also observed that fintech lenders are not subject to the same level of scrutiny as small community banks and credit unions which are subject to supervision for compliance with anti-discrimination laws.

The questions set forth in Mr. Cleaver’s letter include inquiries about a lender’s small business products and originations, approach to protecting borrowers belonging to protected classes, percentage of “loan and advances [that] are originated to borrowers of color [and] [w]omen,” “the typical rate charged to borrowers of color as compared to [the lender’s] overall borrower population,” typical fee schedule for small business lending products, and use of mandatory arbitration agreements.  In his announcement about the letter, Mr. Cleaver listed the lenders to whom his letter was sent.  We understand that most of such lenders do not make small business loans.

This past March, Mr. Cleaver sent a letter to the CFPB in which he asked the agency to investigate whether fintech companies were complying with anti-discrimination laws, including the Equal Credit Opportunity Act.  Mr. Cleaver also asked the CFPB to respond to a series of questions that included when the CFPB anticipated finalizing regulations to implement Dodd-Frank Section 1071.  Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses. The Financial CHOICE Act passed this month by the House includes a repeal of Section 1071 and the Treasury report issued this month recommended that Section 1071 be repealed.

 

 

Earlier this month, Attorney General Jeff Sessions issued a memorandum in which he prohibited DOJ attorneys from entering into settlement agreements on behalf of the United States that require a payment or loan to any non-governmental person or entity that is not a party to the dispute.  The AG’s press release explained that the directive was intended to end the use of settlement funds to “to bankroll third party special interest groups or the political friends of whoever is in power.”

Last week, Senator Charles E. Grassley, who chairs the Senate Judiciary Committee, sent a letter to the AG in which he asked Mr. Sessions to explain whether any payments made by settling defendants to non-governmental third parties during the Obama Administration at the DOJ’s direction “could lawfully be rescinded and re-directed back into the General Fund of the U.S. Treasury.”  Mr. Grassley also asked Mr. Sessions to explain when the DOJ will begin to seek the rescission or re-direction of settlement payments “[i]f such a procedure is consistent with law and the Department’s authority.”

Mr. Grassley’s letter includes a request for a “complete list of all settlement agreements reached during the Obama administration that involved payments to non-governmental third parties” and related information for each of the settlements, including a full accounting of what payments have been made to non-governmental third parties to date.

 

 

We previously reported on the Executive Order 13772 titled “Core Principles for Regulating the United States Financial System,” which is a high-level policy statement consisting of a series of Core Principles that are designed to inform the manner in which the Administration regulates the financial system.  The Executive Order directs the Secretary of the Treasury to identify, in a report to the President, any laws, regulations, guidance and other Government policies “that inhibit Federal regulation of the United States financial system in a manner consistent with the Core Principles.”

The American Bankers Association (“ABA”) has submitted a white paper that identifies areas of concern with respect to various fair lending topics.  In this white paper, the ABA “offers its views” in relation to the directive that the Secretary has received pursuant to the Executive Order:

  • Under the Fair Housing Act (“FHA”), federal agencies should apply the disparate impact theory of liability consistent with the framework outlined by the Supreme Court in Inclusive Communities.
  • Disparate impact claims are not cognizable under the Equal Credit Opportunity Act.
  • Redlining should be assessed consistent with the Community Reinvestment Act (“CRA”), and purchased loans should be recognized as promoting access to credit.
  • The focus of the CFPB should remain on consumers, not business.

Inclusive Communities Framework: The ABA comment concerning FHA disparate impact claims arises from industry concerns that federal agencies have largely disregarded the safeguards against abusive disparate impact claims that were a centerpiece of the Supreme Court decision in Inclusive Communities.  In the aftermath of the Supreme Court decision in Inclusive Communities, the ABA sent a letter to the federal bank regulatory agencies, the CFPB, HUD and the DOJ requesting confirmation “in interagency guidance, updated exam procedures, and where appropriate amended regulations that the Agencies’ consideration of disparate impact claims in both the supervisory and enforcement context will be governed by standards consistent with the . . . framework in” Inclusive Communities.

The white paper asserts, however, that “[t]here has been nothing” of the sort by these agencies in response to Inclusive Communities and that “examples where a federal agency has taken action to apply the Court’s framework for consideration of disparate impact are hard to find.”  After observing that some defendants have succeeded in fair lending litigation by asserting the [Inclusive Communities] safeguards against abusive disparate impact claims, the ABA notes that “[a] win in court comes after much time and expense and public reputational damage.”  The concern expressed therefore is that “the menace of supervisory assertion of disparate impact claims without appropriate controls can exalt leverage over law.”

Rejection of ECOA Disparate Impact Claims: The comment regarding the ECOA is premised on the rationale of the Supreme Court decision in Inclusive Communities, which highlighted key differences between the FHA and the ECOA that support the view that disparate impact claims are not cognizable under the ECOA.  It thus is consistent with observations expressed in our article regarding the Supreme Court decision, as well as those expressed more recently in the Majority Staff Report of the House Financial Services Committee titled “Unsafe at Any Bureaucracy, Part III: The CFPB’s Vitiated Legal Case Against Auto Lenders.”  This issue is discussed in greater detail in a Business Lawyer article titled “The ECOA Discrimination Proscription and Disparate Impact– Interpreting the Meaning of the Words That Actually Are There,” 61 Bus. Law. 829 (2006).  The recommendations of the ABA include a request that “[t]he Agencies should acknowledge in writing that disparate impact claims are not recognized under the ECOA.”

Redlining and Purchased Loans: The CRA-related comments concerning redlining and purchased loans are premised on the ABA’s assertion that agencies have “invent[ed] redlining [claims] by ignoring intent, CRA performance or purchased loans.”  Significantly, the ABA notes that, “[i]n recent enforcement actions, Agencies have disregarded a bank’s CRA assessment area” and, instead “have overlaid their own creation, a ‘reasonably expected market area’ (REMA) or a ‘Proper Assessment Area’ – an area Agencies assert that the bank should serve.”  The redlining case against Klein Bank would be an example of this phenomenon.  The ABA asserts that this approach has resulted in “the curious anomaly of banks that received high CRA marks over an extended period of time facing regulatory assertions of redlining.”  Finally, the white paper notes that “in some enforcement actions Agencies have been unwilling to consider purchased loans, despite the fact that under CRA banks are encouraged to purchase loans.”

CFPB Focus: The comment that the focus of the Bureau should remain on consumer credit culminates in the following specific recommendations: (i) repeal of Section 1071 of the Dodd-Frank Act relating to the collection and reporting of data concerning lending to “women-owned, minority-owned and small business”; (ii) reassigning the implementation of Section 1071 to the Small Business Administration as an interim measure; and (iii) eliminating “any vestige of Bureau regulatory, supervisory, or enforcement authority over commercial credit or other commercial account and financial services” by means of a series of specific amendments to the Dodd-Frank Act.  (The Financial CHOICE Act bill passed by the House of Representatives last week includes a repeal of Section 1071.)

Late yesterday the U.S. Department of the Treasury issued the first in a series of reports to the President pursuant to Executive Order 13772 regarding “Core Principles for Regulating the United States Financial System.”  We will be reviewing this report, and the subsequent reports that the Treasury Department press release indicates will be issued “over the coming months.”

On June 7, 2017, Attorney General Jeff Sessions issued a memorandum directing that “Department attorneys may not enter into any agreement on behalf of the United States in settlement of federal claims or charges . . . that directs or provides for a payment or loan to any non-governmental person or entity that is not a party to the dispute.” In a press release, he explained that “settlement funds should go first to the victims and then to the American people—not to bankroll third party special interest groups or the political friends of whoever is in power.”

The DOJ and CFPB frequently include such provisions in consent orders settling fair lending claims. For example, in BancorpSouth Bank’s consent order with the CFPB and DOJ, the bank agreed to spend $500,000 on “partnerships” with “one or more community-based organizations or governmental organizations that provide credit, financial education, homeownership counseling, credit repair, and/or foreclosure prevention services to the residents of majority–minority neighborhoods . . . .” Other banks in other fair lending cases have been required to contribute $750,000 to similar organizations.

Each of the fair lending settlements involved substantially more money than the funds directed at community organizations. Nevertheless, the sums that the defendants were required to spend on these organizations were not insubstantial. Under the DOJ’s new policy, these components of the settlements would be prohibited. Given that the DOJ and CFPB do not always see eye to eye under the new administration, it is unclear how the Attorney General’s new policy will impact future fair lending settlements involving both federal agencies. We will, of course, continue to monitor these cases and keep you posted.

In its new annual report covering its fair lending activities during 2016, the CFPB identifies the following three areas on which it “will increase our focus” in 2017:

  • Redlining.  The CFPB “will continue to evaluate whether lenders have intentionally discouraged prospective applicants in minority neighborhoods.”
  • Mortgage and Student Loan Servicing.  The CFPB “will evaluate whether some borrowers who are behind on their mortgage or student loan payments may have more difficulty working out a new solution with the servicer because of their race, ethnicity, sex, or age.”
  • Small Business Lending.  “Congress expressed concern that women-owned and minority-owned businesses may experience discrimination when they apply for credit, and has required the CFPB to take steps to ensure their fair access to credit.  Small business lending supervisory activity will also help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection process; and the nature, extent, and management of fair lending risk.”

The three 2017 priority areas are the same as those identified by Patrice Ficklin, Associate Director of the CFPB’s Office of Fair Lending, in her December 2016 blog post that outlined the CFPB ‘s fair lending priorities for 2017.  However, unlike Ms. Ficklin’s blog post, the fair lending report includes the CFPB’s plans to ramp up its small business lending supervisory activity. 

The report states that in 2016, CFPB fair lending supervisory and public enforcement actions resulted in approximately $46 million in remediation.  In the report’s section on supervisory activities, the CFPB reviews information previously provided in its June 2016 Mortgage Servicing Special Edition of Supervisory Highlights and its Summer 2016 and Fall 2016 editions of Supervisory Highlights.  In the section on enforcement, the CFPB reviews several fair lending public enforcement actions and its implementation of several consent orders.  The report also discusses HMDA warning letters sent by the CFPB in October 2016 and notes that in 2016, the CFPB referred 8 matters to the Department of Justice.  The CFPB states that at the end of 2016, it had a number of pending redlining investigations as well as a number of pending investigations in other areas.  It is unclear how much collaboration between the CFPB and DOJ will occur in the Trump Administration. 

In the section on rulemaking, the CFPB discusses its final rule amending Regulation C (which implements HMDA) and related HMDA/Regulation C developments.  The CFPB also discusses the status of the new uniform residential loan application, the collection of race and ethnicity information under Regulation B, and its March 2017 proposal regarding amendments to Regulation B to facilitate Regulation C compliance and address other issues.  

In discussing its progress in developing rules on the collection of small business lending data to implement Section 1071 of Dodd-Frank, the CFPB tracks verbatim much of what was stated in last year’s fair lending report.  (Section 1071 amended the ECOA to require financial institutions to collect and maintain certain data in connection with credit applications made by women- or minority-owned businesses and small businesses.)  As it did last year, the CFPB states that the first stage of its Section 1071 work will be focused on outreach and research, after which it “will begin developing proposed rules concerning the data to be collected and determining the appropriate procedures and privacy protections needed for  information-gathering and public disclosure.”  The report again states that the CFPB “has begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  This year’s report adds the statement above that the CFPB intends to use its future small lending supervisory activity to “help expand and enhance the Bureau’s knowledge in this area, including the credit process; existing data collection processes; and the nature, extent, and management of fair lending risk.” 

Two other sections of the report discuss the CFPB’s coordination with other federal agencies on fair lending issues and outreach to industry and consumers (such as through speaking engagements and roundtables, blog posts, and supervisory highlights).  The last section of the report is intended to satisfy certain ECOA and HMDA reporting requirements, including providing a summary of other agencies’ ECOA enforcement efforts and reporting on the utility of certain HMDA reporting requirements.    

The CFPB may seek to rely on a recent Seventh Circuit employment discrimination case to support its view that the Equal Credit Opportunity Act’s (ECOA’s) prohibition against discrimination on the basis of “sex” includes discrimination based on sexual orientation.

In Hively v. Ivy Tech Community College of Indiana, the court held that Title VII of the Civil Rights Act of 1964 prohibits employment discrimination against individuals because of their sexual orientation. The court also concluded there was no difference between discrimination based on gender nonconformity—which the U.S. Supreme Court held in Price Waterhouse v. Hopkins nearly thirty years ago was actionable under Title VII—and sexual orientation. In addition, the court drew parallels to associational discrimination, which was held to be unlawful in Loving v. Virginia, and which is likewise considered to violate the ECOA and Regulation B.

Since at least last year, the CFPB has signaled that discrimination on the basis of gender identity and sexual orientation might be a focus of fair lending supervision and enforcement. Director Cordray indicated as much in a 2016 letter to the organization SAGE (Services & Advocacy for GLBT Elders). The letter, which we wrote about here, discussed Price Waterhouse and other Title VII cases and noted that Title VII precedents traditionally guide judicial interpretation of ECOA and Regulation B.

With Hively, the Seventh Circuit becomes the first circuit court of appeals to conclude that an employment discrimination claim may be brought on the basis of sexual orientation, although that position has not been endorsed in other circuits. In March, the Eleventh Circuit held in Evans v. Georgia Regional Hospital that gender non-conformity claims are distinct from claims based on sexual orientation and that sexual orientation claims are not actionable under Title VII.

Also in March, a three-member panel of the Second Circuit issued an opinion in Christiansen v. Omnicom Group, Inc., in which it declined to hold that Title VII encompasses discrimination based on sexual orientation, citing its lack of authority to reconsider an en banc decision to the contrary handed down in 2000, Simonton v. Runyan. The plaintiff in the Christiansen case has until April 28 to file a petition for rehearing en banc.

Notwithstanding this circuit split, in light of the SAGE letter and Hively, we would encourage supervised entities to consult with their counsel and to consider revising their policies, procedures and fair lending analyses to incorporate discrimination based on sexual orientation. In doing so, supervised institutions should also be mindful of the fact that numerous state laws already prohibit discrimination in credit transactions on the basis of sexual orientation and gender identity.

The Office of Inspector General for the Fed and CFPB has issued a report on the results of an evaluation it conducted to determine whether the CFPB effectively mitigates the risk of potential conflicts of interest associated with using vendors to support fair lending supervision and enforcement.  In addition to performing fair lending analysis internally, the CFPB contracts with outside vendors to conduct fair lending enforcement analysis and expert witness services.  The OIG focused its evaluation on the CFPB’s management of one fair lending enforcement vendor’s potential conflicts of interest after the CFPB had awarded a contract to that vendor.

The CFPB’s contracts for fair lending analysis require the vendor, before performing work on a new task order, to provide a detailed written disclosure of all actual conflicts, potential conflicts, or matters that may present the appearance of a conflict under the federal regulation that guides the acquisition of goods and services by executive agencies.  (Although the CFPB takes the position that it is not required to follow this regulation because it is an independent regulatory agency, it has made a policy decision to follow the regulation for its procurements.)  The contracts also require the vendor to provide a detailed written plan explaining the steps it will take to avoid or mitigate such conflicts.

For the vendor contract it evaluated, the OIG found that the CFPB did not obtain conflict of interest disclosures or mitigation plans in conjunction with each task order.  (It noted that two task orders did not identify the companies the vendor would analyze for fair lending compliance.)  The OIG attributed the lapse in documentation to inconsistent enforcement of conflict of interest contractual provisions, inconsistent task order requirements, and a lack of clear roles and responsibilities for enforcing contract provisions.  It commented that this weakness could expose the CFPB to reputational and operational risk if a potential conflict of interest is not identified or mitigated before the vendor begins performing work that presents an actual conflict or an appearance of a conflict.  The OIG noted, however, that it did not identify any actual conflicts of interest between the vendor and the companies it analyzed.

The report contains a series of recommendations for how the CFPB can strengthen its controls for identifying and avoiding potential conflicts of interest, including ensuring that vendors comply with existing documentation requirements.  The OIG also recommended that the CFPB evaluate the potential costs and benefits of performing more fair lending analysis internally.