During Richard Cordray’s tenure as CFPB director, it began to look like we were heading toward an era of much more aggressive application of the Equal Credit Opportunity Act to small business lending.  The biggest potential development was the anticipated small-business lending data collection rule, which would have imposed HMDA-like reporting requirements for small business lending, which in turn would have generated the statistical information that could have been used in fair lending examinations and enforcement with respect to small business lending.

The data collection rule was not completed by the time Richard Cordray resigned last November, but it still appears as an active matter on the CFPB’s regulatory agenda.  However, last week, Politico published a story, suggesting that the rule is not likely to be pursued by the CFPB in the near future.

Around the same time, the CFPB released an edition of Supervisory Highlights that included a section on small business fair lending considerations.  My read of the discussion is that the CFPB was encouraging measures taken by small business lenders to drive consistency in underwriting decisions, but there was no suggestion of any sort of proxy-based statistical analysis or other more difficult compliance steps recommended in the recent Highlights discussion.

So where does this leave us with respect to potential regulatory application of the Equal Credit Opportunity Act to small business lending?  It appears to me that the CFPB is likely to push small business lenders to adopt consistency measures similar to those described in Supervisory Highlights, but there does not appear to be any move toward bringing disparate impact cases in this area, either based on a proxy methodology or based on a data collection rule that doesn’t seem to be forthcoming in the near future.  So, the concern that had developed during Richard Cordray’s tenure about aggressive disparate impact cases in the small business lending world appears to be retreating, if not disappearing entirely, for the time being.  Small business lenders should still do their best to make their underwriting decisions as objective and consistent as possible, but we believe the regulatory input to this process will be encouraging measures of this nature, rather than anything more forceful.

It appears likely that California Governor Jerry Brown will sign a bill passed on August 31 by the state’s Senate, Senate Bill 1235, which would create consumer-style disclosure requirements for certain commercial loans and other finance products, such as merchant cash advances and factoring transactions.

Notably, the new disclosure requirements would apply to sponsors of bank-model lending programs in addition to companies directly extending certain forms of commercial credit pursuant to California Finance Lender licenses.  The requirements would apply whenever the company receiving financing is located in California, even if the company providing the financing is located outside the state.  Although the bill contains several ambiguities and potential loopholes created by last-minute amendments, Governor Brown is expected to sign it over industry opposition.

The bill’s central feature is a requirement that “providers” make a series of disclosures before consummation of a covered transaction and must obtain the recipient’s signature on the disclosures which include the “total dollar cost of the financing” and the “total cost of the financing expressed as an annualized rate.”  As used in the bill, the term “provider” includes both a “person who extends a specific offer of commercial financing to a recipient,” and certain bank-model program sponsors, i.e., “a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.”

“Commercial financing” is defined broadly to include “an accounts receivable purchase transaction, including factoring, asset-based lending transaction, commercial loan, commercial open-end credit plan, or lease financing transaction intended by the recipient for use primarily for other than personal, family, or household purposes.”  This would appear to include commercial credit cards but not commercial sales finance contracts.  There are exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property.

For more information about the bill, see our legal alert.

 

The CFPB’s newly-released Summer 2018 edition of Supervisory Highlights represents the CFPB’s first Supervisory Highlights report covering supervisory activities conducted under Acting Director Mick Mulvaney’s leadership.  The Bureau’s most recent prior Supervisory Highlights report was its Summer 2017 edition, which was issued in September 2017.

On October 10, 2018, from 12 p.m. to 1 p.m. ET, Ballard Spahr attorneys will hold a webinar, “Key Takeaways from the CFPB’s Summer 2018 Supervisory Highlights.”  The webinar registration form is available here.

Noticeably absent from the new report’s introduction and the Bureau’s press release about the report are statements touting the amount of restitution payments that resulted from supervisory resolutions or the amounts of consumer remediation or civil money penalties resulting from public enforcement actions connected to recent supervisory activities.  (The report does, however, include summaries of the terms of two consent orders entered into by the Bureau, including its settlement with Triton Management Group, Inc., a small-dollar lender, regarding the Bureau’s allegations that Triton had violated the Truth in Lending Act and the CFPA’s UDAAP prohibition by underdisclosing the finance charge on auto title pledges entered into with consumers.)

The report confirms that the Bureau’s supervisory activities have continued without significant change under its new leadership.  It includes the following information:

Automobile loan servicing.  The report indicates that in examinations of auto loan servicing activities, Bureau examiners focus primarily on whether servicers have engaged in unfair, deceptive, or abusive acts or practices prohibited by the CFPA.  It discusses instances observed by examiners in which servicers had sent billing statements to consumers who had experienced a total vehicle loss showing that the insurance proceeds had been applied to the loan so that the loan was paid ahead and the next payment was due months or years in the future.  The CFPB found the due dates in these statements to be inconsistent with the terms of the consumers’ notes which required the insurance proceeds to be applied to the loans as a one-time payment and any remaining balance to be collected according to the consumers’ regular payment schedules.  According to the CFPB, sending such statements was a deceptive practice.  The CFPB indicates that in response to the examination findings, servicers are sending billing statements that accurately reflect the account status after applying insurance proceeds.

The Bureau also found instances where servicers, due to incorrect account coding or the failure of their representatives to timely cancel the repossession, had repossessed vehicles after the repossession should have been cancelled because the consumer had entered into an extension agreement or made a payment.  This was found to be an unfair practice.  The CFPB indicates that in response to the examination findings, servicers are stopping the practice, reviewing the accounts of affected consumers, and removing or remediating all repossession-related fees.

Credit cards.  The report indicates that in examinations of the credit card account management operations of supervised entities, Bureau examiners typically assess advertising and marketing, account origination, account servicing, payments and periodic statements, dispute resolution, and the marketing, sale and servicing of add-on products.  The Bureau found instances where entities failed to properly re-evaluate credit card accounts for APR reductions in accordance with Regulation Z requirements where the APRs on the accounts had previously been increased. The report indicates that the issuers have undertaken, or developed plans to undertake, remedial and corrective actions in response to the examination findings.

Debt collection.  In examinations of larger participants, Bureau examiners found instances where debt collectors, before engaging in further collection activities as to consumers from whom they had received written debt validation disputes, had routinely failed to mail debt verifications to such consumers. The Bureau indicates that in response to the examination findings, the collectors are revising their debt validation procedures and practices to ensure that they obtain appropriate verifications when requested and mail them to consumers before engaging in further collection activities.

Mortgage servicing.  The report indicates that in examinations of servicers, Bureau examiners focus on the loss mitigation process and, in particular, on how servicers handle trial modifications where consumers are paying as agreed. In such examinations, the Bureau found unfair acts or practices relating to the conversion of trial modifications to permanent status and the initiation of foreclosures after consumers accepted loss mitigation offers.  In reviewing the practices of servicers with policies providing for permanent modifications of loans if consumers made four timely trial modification payments, the Bureau found that for nearly 300 consumers who successfully completed the trial modification, the servicers delayed processing the permanent modification for more than 30 days.  During these delays, consumers accrued interest and fees that would not have been accrued if the permanent modification had been processed.  The servicers did not remediate all of the affected consumers ,did not have policies or procedures for remediating consumers in such circumstances, and attributed the modification delays to insufficient staffing.  The Bureau indicates that in response to the examination findings, the servicers are fully remediating affected consumers and developing and implementing policies and procedures to timely convert trial modifications to permanent modifications where the consumers have met the trial modification conditions.

The Bureau also identified instances in which servicers, due to errors in their systems, had engaged in unfair acts or practices by charging consumers amounts not authorized by modification agreements or mortgage notes.  The Bureau indicates that in response to the examination findings, the servicers are remediating affected consumers (presumably by refunding or credit the unauthorized amounts) and correcting loan modification terms in their systems.

With regard to foreclosure practices, Bureau examiners found instances where mortgage servicers had approved borrowers for a loss mitigation option on a non-primary residence and, despite representing to borrowers that they would not initiate foreclosure if the borrower accepted loss mitigation offers in writing or by phone by a specified date, initiated foreclosures even if the borrowers had called or written to accept the loss mitigation offers by that date.  The Bureau identified this as a deceptive act or practice. The Bureau also found instances where borrowers who had submitted complete loss mitigation applications less than 37 days from a scheduled foreclosure sale date were sent a notice by their servicer indicating that their application was complete and stating that the servicer would notify the borrowers of their decision on the applications in writing within 30 days.  However, after sending these notices, the servicers conducted the scheduled foreclosure sales without making a decision on the borrowers’ loss mitigation application.  Interestingly, while the Bureau did not find that this conduct amounted to a “legal violation,” it did find that it could pose a risk of a deceptive practice.

Payday/title lending.  Bureau examiners identified instances of payday lenders engaging in deceptive acts or practices by representing in collection letters that “they will, or may have no choice but to, repossess consumers’ vehicles if the consumers fail to make payments or contact the entities.”  The CFPB observed that such representations were made “despite the fact that these entities did not have business relationships with any party to repossess vehicles and, as a general matter, did not repossess vehicles.”  The Bureau indicates that in response to the examination findings, these entities are ensuring that their collection letters do not contain deceptive content.  Bureau examiners also observed instances where lenders had used debit card numbers or Automated Clearing House (ACH) credentials that consumers had not validly authorized them to use to debit funds in connection with a defaulted single-payment or installment loan.  According to the Bureau, when lenders’ attempts to initiate electronic fund transfers (EFTs) using debit card numbers or ACH credentials that a borrower had identified on authorization forms executed in connection with the defaulted loan were unsuccessful, the lenders would then seek to collect the entire loan balance via EFTs using debit card numbers or ACH credentials that the borrower had supplied to the lenders for other purposes, such as when obtaining other loans or making one-time payments on other loans or the loan at issue.  The Bureau found this to be an unfair act or practice.  With regard to loans for which the consumer had entered into preauthorized EFTs to recur at substantially regular intervals, the Bureau found this conduct to also violate the Regulation E requirement that preauthorized EFTs from a consumer’s account be authorized by a writing signed or similarly authenticated by the consumer.  The Bureau indicates that in response to the examination findings, the lenders are ceasing the violations, remediating borrowers impacted by the invalid EFTs, and revising loan agreement templates and ACH authorization forms.

Small business lending. The Bureau states that in 2016 and 2017, it “began conducting supervision work to assess ECOA compliance in institutions’ small business lending product lines, focusing in particular on the risks of an ECOA violation in underwriting, pricing, and redlining.”  It also states that it “anticipates an ongoing dialogue with supervised institutions and other stakeholders as the Bureau moves forward with supervision work in small business lending.”  In the course of conducting ECOA small business lending reviews, Bureau examiners found instances where financial institutions had “effectively managed the risks of an ECOA violation in their small business lending programs,” with the examiners observing that “the board of directors and management maintained active oversight over the institutions’ compliance management system (CMS) framework.  Institutions developed and implemented comprehensive risk-focused policies and procedures for small business lending originations and actively addressed the risks of an ECOA violation by conducting periodic reviews of small business lending policies and procedures and by revising those policies and procedures as necessary.”  The Bureau adds that “[e]xaminations also observed that one or more institutions maintained a record of policy and procedure updates to ensure that they were kept current.”  With regard to self-monitoring, Bureau examiners found that institutions had “implemented small business lending monitoring programs and conducted semi-annual ECOA risk assessments that include assessments of small business lending.  In addition, one or more institutions actively monitored pricing-exception practices and volume through a committee.”  When the examinations included file reviews of manual underwriting overrides at one or more institutions, Bureau examiners “found that credit decisions made by the institutions were consistent with the requirements of ECOA, and thus the examinations did not find any violations of ECOA.”  The only negative findings made by Bureau examiners involved instances where institutions had collected and maintained (in useable form) only limited data on small business lending decisions.  The Bureau states that “[l]imited availability of data could impede an institution’s ability to monitor and test for the risks of ECOA violations through statistical analyses.”

Supervision program developments.  The report discusses the March 2018 mortgage servicing final rule and the May 2018 amendments to the TILA-RESPA integrated disclosure rule.  With regard to fair lending developments, it discusses recent HMDA-related developments and small business lending review procedures.  With regard to small business lending, the Bureau highlights that its reviews include a fair lending assessment of an institution’s compliance management system (CMS) related to small business lending and that CMS reviews include assessments of the institution’s board and management oversight, compliance program (policies and procedures, training, monitoring and/or audit, and complaint response), and service provider oversight.  The CFPB indicates that in some ECOA small business lending reviews, examiners may look at an institution’s fair lending risks and controls related to origination or pricing of small business lending products, including a geographic distribution analysis of small business loan applications, originations, loan officers, or marketing and outreach, in order to assess potential redlining risk.  It further indicates that such reviews may include statistical analysis of lending data in order to identify fair lending risks and appropriate areas of focus during the examination.  The Bureau states that “[n]otably, statistical analysis is only one factor taken into account by examination teams that review small business lending for ECOA compliance. Reviews typically include other methodologies to assess compliance, including policy and procedure reviews, interviews with management and staff, and reviews of individual loan files.”

In the CFPB’s RFI on its supervision program, one of the topics on which the CFPB sought comment is the usefulness of Supervisory Highlights to share findings and promote transparency.  The new report indicates that the Bureau “expects the publication of Supervisory Highlights will continue to aid Bureau-supervised entities in their efforts to comply with Federal consumer financial law.”  Presumably, this means that we will now again be seeing new editions of Supervisory Highlights on a regular basis.

 

In a notice published in today’s Federal Register, the CFPB announced that it has extended the comment period on its small business lending RFI until September 14, 2017.

The CFPB issued the RFI, together with a white paper on small business lending, in May 2017 in conjunction with a field hearing on small business lending.  The RFI is intended to inform the CFPB’s rulemaking to implement Dodd-Frank Act section 1071.  At last month’s meeting of the CFPB’s Consumer Advisory Board, Director Cordray indicated that in response to requests for additional time to respond to the RFI, the CFPB had decided to extend the comment period (which would have expired on July 14) by 60 days.  Today’s Federal Register notice specifically referenced a letter the CFPB received on May 23 from thirteen industry trade associations requesting a 60-day comment period extension.

 

 

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.

 

 

In his prepared remarks for today’s Consumer Advisory Board meeting, Director Cordray discussed CFPB initiatives in four areas.  In addition to the CFPB’s letter to the top retail credit card companies encouraging them to use zero-interest promotions instead of deferred-interest promotions and its new report on consumers transitioning to credit visibility, Director Cordray discussed the CFPB’s RFI on the small business lending market and its debt collection rulemaking.   

Last month, in conjunction with a field hearing, the CFPB issued the RFI, together with a white paper on small business lending.  In his remarks, Director Cordray revealed that, in response to requests for additional time to respond to the RFI (which currently has a July 14, 2017 comment deadline), the CFPB is extending the comment period by 60 days.  He also indicated that the CFPB has “been hearing from congressional officials who want to see more progress made on [the Section 1071] rulemaking” and that the CFPB is “now moving forward.”   

With regard to the CFPB’s debt collection rulemaking, Director Cordray discussed the debt collection proposals under consideration by the CFPB which it released last July in anticipation of convening a SBREFA panel.  The coverage of the CFPB’s SBREFA proposals was limited to “debt collectors” that are subject to the FDCPA.  When it issued the proposals, the CFPB indicated that  it expected to convene a second SBREFA panel in the “next several months” to address a separate rulemaking for creditors and others engaged in debt collection not covered by the proposals. 

In his remarks, Director Cordray described the proposals as focused on three primary issues: “mak[ing] sure that collectors are contacting the right consumers, for the right amount”; “mak[ing] sure that consumers clearly understand the debt collection process and their rights”; and “mak[ing] sure that consumers are treated with dignity and respect, particularly in their communications with collectors.”  He indicated that when the CFPB evaluated “the feedback we received on the proposals under consideration” (presumably the report of the SBREFA panel on the input received from the small entity representatives who met with the panel), it became clear that “[w]riting rules to make sure debt collectors have the right information about their debts is best handled by considering solutions from first-party creditors and third-party collectors at the same time.”  He observed that “[f]irst-party creditors like banks and other lenders create the information about the debt, and they may use it to collect the debt themselves.  Or they may provide it to companies that collect the debt on their behalf or buy the debt outright.  Either way, those actually collecting on the debts need to have the correct and accurate information.” 

He commented that because “breaking the different aspects of the informational issues into pieces in two distinct rules was shaping up to be troublesome in various ways,” the CFPB has decided to write a market-wide rule in which it will “consolidate all the issues of ‘right consumer, right amount’ into the separate rule we will be developing for first-party creditors, which will now cover these intertwined issues for third-party collectors and debt buyers as well.”   He indicated that this approach will allow the CFPB “to move forward more quickly with a proposed rule focused on the remaining issues” concerning disclosures by debt collectors and how consumers are treated by debt collectors and that “[o]nce we proceed with a proposed rule on these issues, we will return to the subject of collecting the right amount from the right consumer, which is a key objective regardless of who is collecting the debt.”

 

 

Yesterday, I attended the CFPB’s field hearing in Los Angeles on small business lending.  In connection with the hearing, the CFPB issued a white paper entitled “Key dimensions of the small business lending landscape,” together with a request for information (RFI) on the small business lending market.

On July 11, 2017, from 12:00 p.m. to 1:00 p.m. ET, Ballard Spahr will hold a webinar, “The CFPB and Small Business Lending:  What You Need to Know.”  Click here to register.

Field Hearing.  The field hearing began with introductory remarks from Los Angeles City Attorney Mike Feuer, California Department of Business Oversight Commissioner Jan Owen, and California Attorney General Xavier Becerra, all of whom expressed support for Director Cordray and opposition to ongoing efforts to rein in the CFPB.  Notably, Mr. Becerra confirmed that he intends to engage in robust and aggressive consumer protection efforts, including using the investigative authority of his office “to the hilt.”

Director Cordray then delivered prepared remarks concerning the CFPB’s small business data collection efforts pursuant to Section 1071 of the Dodd-Frank Act.  In addition to discussing the data collection initiative, Director Cordray opined that the line between consumer and small business lending is often “blurred,” and made a number of other statements suggesting (but not directly stating) interest in regulating small business lending.  Perhaps hinting at a run for Governor of Ohio, Director Cordray spent a fair amount of time lauding an Ohio loan subsidy program he operated as Ohio State Treasurer, claiming it has been successful in facilitating lending to small businesses.

Director Cordray’s remarks were followed by a panel discussion led by Acting Deputy Director David Silberman and CFPB representatives Grady Hedgespeth and Cheryl Parker Rose.  The individuals providing testimony were: Elba Schildcrout, East Los Angeles Community Corporation; Makini Howell, Main Street Alliance; Josh Silver, National Community Reinvestment Coalition;  Kate Larson, U.S. Chamber of Commerce; Todd Hollander, Union Bank; and Robert Villarreal, CDC Small Business Finance.  Conspicuously absent from the panel was a representative of nonbanks providing financing to small businesses.

White Paper and RFI.  As it did in its annual fair lending report issued last month, the CFPB states in the white paper and RFI that it is in the early stages of its work to develop regulations implementing Section 1071, with such work currently focused on outreach and research.  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 as the race, sex, and ethnicity of the principal owners of the business.  In the white paper, the CFPB discusses the initial findings of its research into the small business lending market.  In the RFI, the CFPB seeks comment on a series of questions ” to enhance [its] understanding of the small business lending market in order to prioritize and guide research and policy development work for implementation of section 1071.”

The white paper includes:

  • An overview of the small business market, including the size of the overall market and the size of women-owned and minority-owned small businesses using SBA standards for qualifying a business as “small”
  • A discussion of the types of financing products available to small businesses, the types of financial institutions that provide such financing, and data showing the distribution of small business lending among types of lenders and financing products
  • An analysis of the availability of small business financing during and since the recession began in 2007

It appears that a primary objective of the white paper is to confirm that the data collection mandated by Section 1071 is needed.  (The ECOA amendment would be repealed by the CHOICE Act bill recently passed by the House Financial Services Committee.)  Throughout the white paper, the CFPB points out the limitations of currently available small business lending data on its ability “to assess how well the market is meeting the needs of small businesses.”  According to the CFPB, Section 1071 data can support efforts to increase credit access in communities with unmet needs by providing “an understanding of the small business credit flowing into their local communities, and allow[ing] them to identify ‘credit deserts’ or sectors where credit flows may be restricted.”  The CFPB also notes the role of Section 1071 in “facilitating the enforcement of fair lending laws,” by providing the data needed “to understand the nature and extent of potential disparities, and to ensure women-owned and minority-owned businesses have non-discriminatory access to capital.”

The RFI contains a series of questions divided into five categories as follows:

  • How “small business” is defined.  The CFPB notes that Section 1071 defines “small business” as having the same meaning as “small business concern” in Section 3 of the Small Business Act. Section 3 gives the Small Business Administration (SBA) authority to set size standards that meet certain statutory criteria.  However, as the CFPB also notes, Section 3 allows the SBA to approve size standards developed by other federal agencies that meet certain requirements.  The CFPB indicates that it is exploring the development of an alternative “small business” definition tailored to the needs of Section 1071.
  • Data points. In addition to requiring the collection of specified data, Section 1071 authorizes the CFPB to require the collection of additional data that it determines “would aid in fulfilling the purposes of [Section 1071].”  The CFPB seeks information on issues such as what data financial institutions are currently collecting on small business lending, how such data overlaps with the data required to be collected under Section 1071, and what concerns and challenges are raised by the Section 1071 required data.
  • Types of financial institutions engaged in small business lending.  Noting its authority under Section 1071 to exempt certain classes of financial institutions from a small business lending data collection rule, the CFPB asks several questions regarding its use of such exemption authority. It also asks about “the roles of lending marketplaces, brokers, dealers and other third parties in the small business lending application process.”
  • Access to credit and financial products offered to small businesses.  The CFPB notes that “term loans, lines of credit, and credit cards are the principal all-purpose products used by small businesses” and “estimates that these products collectively comprise about three-fourths of the non-equity financing market, when excluding supplier financing.”  The CFPB asks questions regarding the types of business credit products offered to small businesses, the application process, and credit reviews on an existing credit facility.
  • Privacy.  Noting its authority under Section 1071 to delete or modify publicly available data to advance a privacy interest, the CFPB asks questions regarding the nature of privacy concerns of applicants and financial institutions related to the potential disclosure of Section 1071 required data and steps the CFPB can take to mitigate such concerns.

Comments in response to the RFI must be received on or before 60 days after the RFI is published in the Federal Register.

The CFPB will hold a field hearing on small business lending in Los Angeles, CA on May 10, 2017.  The announcement, which took the form of a posting on the events page of the CFPB’s website, contains only the usual statement that the hearing will feature “remarks from Director Cordray, as well as testimony from community groups, industry representatives, and members of the public.”

Since the CFPB typically holds field hearings in conjunction with announcing a related development, it might announce a development involving the CFPB’s rulemaking to implement Section 1071 of Dodd-Frank.  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 as the race, sex, and ethnicity of the principal owners of the business.

In its annual fair lending report issued earlier this month, the CFPB stated that it had “begun to explore some of the issues involved in the rulemaking, including engaging numerous stakeholders about the statutory reporting requirements.”  Also, at the recent House Financial Services Committee hearing at which Director Cordray appeared, Chairman Hensarling criticized the CFPB for not proceeding more quickly to issue a regulation to implement Section 1071.

 

 

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 has issued a request for information (RFI) that seeks information about the use of alternative data and modeling techniques in the credit process.  On March 21, 2017 from 12:00 to 1:00 p.m. ET, Ballard Spahr attorneys will hold a webinar: The New Frontier of Alternative Credit Models: Opportunities, Risks and the CFPB’s Request for Information.  A link to register is available here.

According to the CFPB, the RFI stems from the Bureau’s desire “to encourage responsible innovations that could be implemented in a consumer-friendly way to help serve populations currently underserved by the mainstream credit system.”  The CFPB had signaled the likelihood of future action relating to alternative credit data in a May 2015 report, “Data Point: Credit Invisibles,” that reported the results of a research project undertaken by the CFPB to better understand the demographic characteristics of consumers without traditional credit reports or credit scores.  The report, which the RFI cites, concluded that the current credit reporting system is precluding certain populations from accessing credit and taking advantage of other economic opportunities.

In conjunction with the RFI’s issuance, the CFPB held a field hearing on alternative credit data in Charleston, West Virginia at which Director Cordray gave remarks.  (In a break from its prior practice, the CFPB did not publish advance notice of the field hearing on its website.)

In the RFI’s Supplementary Information, the CFPB states that it not only seeks information relating to consumer credit but, “because some of the Bureau’s authorities relate to small business lending,” it “welcomes information about alternative data and modeling techniques in business lending markets as well.”  To that end, for many of the specific questions asked in the RFI on which the CFPB seeks comments, the CFPB asks commenters to describe “any differences in your answers as they pertain to lending to businesses (especially small businesses) rather than consumers.”  (The CFPB notes the ECOA’s coverage of consumer and business credit and that it has begun the process of writing regulations to implement Dodd-Frank Section 1071, which requires data collection and reporting for lending to women-owned, minority-owned, and small businesses.)  Comments on the RFI must be received on or before May 19, 2017.

The Supplementary Information includes a discussion of alternative data and modeling techniques in which the CFPB provides examples of the types of data and modeling techniques that have been labeled “alternative.”  It also discusses prior research by other federal regulators, such as the FTC’s report on big data.  (The CFPB notes that the non-traditional data that might be used to assess borrower creditworthiness could include “big data.”  To address the growing interest in the use of “big data” and “machine learning” by a wide range of businesses, we recently held a webinar, “Big Data and Computer Learning – Lots of Opportunity and Lots of Legal Risk.”)

In the Supplementary Information, the CFPB lists potential consumer benefits and risks it has identified and states that it intends to use the information gleaned from the RFI’s questions “to help maximize the benefits and minimize the risks” from the use of alternative data and modeling techniques.  The RFI contains 20 specific questions (most of which have numerous subsidiary questions) that are divided into four sections: alternative data, alternative modeling techniques, potential benefits and risks to consumers and market participants, and specific statutes and regulations as they pertain to alternative data and modeling techniques.  The CFPB notes that although each question speaks generally about all decisions in the credit process, “answers can differentiate, as appropriate, between uses in marketing, fraud detection and prevention, underwriting, setting or changes in terms (including pricing), servicing, collections, or other relevant aspects of the credit process.”

The CFPB states in the RFI that it not only seeks to understand the benefits and risks stemming from the use of alternative data and modeling techniques, but “also to begin to consider future activity to encourage their responsible use and lower unnecessary barriers, including any unnecessary regulatory burden or uncertainty that impedes such use.”  We hope the CFPB’s issuance of the RFI reflects its recognition of the complexity of the issues involved in the use of alternative data and modeling techniques and the need for it to carefully consider the interests of all stakeholders.