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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.

 

 

A Democratic congressman has raised concerns about potentially discriminatory lending practices used by fintech companies that extend credit to small businesses, calling on the CFPB “to vigorously investigate whether [such fintech companies] are complying with all anti-discrimination laws, including the Equal Credit Opportunity Act.”

In a letter to Director Cordray dated March 15, 2017, Representative Emanuel Cleaver, II, stated that fintech companies “geared toward lending to small businesses by using certain biased algorithms for creditworthiness have the potential of charging disproportionately higher rates to minority-owned businesses.”  He asserted that, as a result, it is important “to determine if minority-owned small businesses are being charged higher rates, or if they have been subject to predatory fees” by fintech companies.

In addition to urging the CFPB to launch an investigation, Rep. Cleaver requested responses to a series of questions that included when the  CFPB anticipates “finalizing regulation and guidance to fully 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.  Such data include the race, sex, and ethnicity of the principal owners of the business.  The CFPB has not yet proposed a rule to implement Section 1071.  In its Fall 2016 rulemaking agenda, the CFPB estimated a March 2017 date for prerule activities.

For more on Rep. Cleaver’s letter, see our legal alert.

The FTC has sent its annual letter to the CFPB reporting on the FTC’s activities related to compliance with the Equal Credit Opportunity Act and Regulation B.

The FTC has authority to enforce the ECOA and Reg B as to nonbank providers within its jurisdiction.  However, like the FTC’s letters on its 2014 and 2015 ECOA activities, the letter on 2016 activities does not describe any 2016 FTC ECOA enforcement activity and only contains information about the FTC’s research and policy development efforts and educational initiatives.

With respect to research and policy development, the letter discusses the following initiatives:

  • Auto survey.  In December 2015, the FTC published a notice in the Federal Register seeking comments on its plans to conduct a survey of consumers regarding their experiences in buying and financing automobiles at dealerships.  The FTC published a second notice in September 2016 seeking clearance from OMB for the survey, addressing comments received in response to the 2015 notice, and inviting further comments.  (In addition to ECOA enforcement authority, the FTC has authority to issue unfair or deceptive trade practices rules for auto dealers under Section 5 of the FTC Act.  The survey could be a prelude to such rulemaking.)
  • Big data report.  In January 2016, the FTC issued a report warning that certain uses of big data consisting of consumer information may implicate various federal consumer protection laws.  The report focused on big data’s impact on low-income and underserved populations and protected groups and discussed the potential applicability of various laws, including the ECOA, to big data practices and provided a list of ”questions for legal compliance” for companies to consider in light of these laws.
  • Fintech forum.  In June 2016, the FTC launched a series of forums exploring emerging financial technology and its implications for consumers.  The first forum focused on marketplace lending and examined how marketplace lending operates, potential consumer benefits, consumer protection issues, and the potential applicability of various consumer protection laws.
  • Report on fraud in African American and Latino communities.  In June 2016, the FTC issued a report on its work on fraud prevention, enforcement, and consumer outreach and education in African American and Latino communities.
  • Changing demographics workshop.  In December 2016, the FTC held a workshop in which the topics discussed included how the population is changing, the impact of those changes on the marketplace, concerns about auto lending and discriminatory lending, and the FTC’s future role.
  • Interagency fair lending task force.  The FTC noted its continued membership in the Interagency Task Force on Fair Lending with the CFPB, DOJ, HUD, and the federal banking agencies.

With regard to the FTC’s consumer and business educational initiatives, the FTC discussed its publication of various blog posts in 2016, including posts about its work in combating fraud, its workshop on changing demographics, its fintech forum, and its big data report.

The Independent Community Bankers of America issued a statement calling on the Trump administration “to rein in the overzealous application of fair lending laws.”  ICBA stated that community banks are threatened by a recent trend of “unwarranted enforcement actions” that “harm community banks and the customers they serve by undermining the availability of credit in local communities and throughout the economy.”

Noting the commitment of community banks to fair lending, the ICBA’s president indicated that “community banks are experiencing enforcement overreach that diverts an abundance of resources from serving their local communities to complying with and responding to unwarranted fair lending allegations.”

The ICBA’s statement noted the DOJ’s recently-filed fair lending action against KleinBank, which it called “a misguided and baseless claim against [the] family-owned [bank], a 110-year-old institution that has never been cited for fair lending violations by its primary regulator, the Federal Deposit Insurance Corp.”  The DOJ’s complaint, which relates to the bank’s residential mortgage lending business, alleges that KleinBank violated the Fair Housing Act and the Equal Credit Opportunity Act by engaging in a pattern or practice of unlawful redlining of the majority-minority neighborhoods in the Minneapolis-St. Paul metropolitan area.  From 2010 to at least 2015, the bank is alleged to have avoided serving the credit needs of individuals seeking residential mortgage loans in majority-minority census tracts in the Metropolitan Statistical Area encompassing Minneapolis and St. Paul.  For a more detailed discussion of the DOJ’s redlining claim, see our legal alert.

According to the ICBA, the KleinBank action “and similar actions directly attack the community banking model, in which hometown financial institutions serve their local communities and economies.  Requiring community banks to expand their market presence into neighboring counties would force them to alter their model and sound business practices.”

The DOJ’s focus on redlining is consistent with the fair lending focus of the CFPB, which recently identified redlining as one of its fair lending priorities for 2017.  The CFPB, in the Fall 2016 edition of Supervisory Highlights, lists factors it considers when assessing redlining risk and explains how it performs an analysis of redlining risk, such as its use of Home Mortgage Disclosure Act and census data to assess an institution’s lending patterns and its comparison of an institution to peer institutions.  These factors, which are described in detail in the Interagency Fair Lending Examination Procedures, include the CRA assessment area and the market area more generally.