August 2020 OBA Legal Briefs

• Fair Lending—in the News and on Your Radar
  • Fair lending and HMDA
  • Fair lending and CRA
  • Paycheck Protection Program
  • Bank of America – disability
  • Townstone – redlining
  • Fair servicing
  • The CFPB’s RFI

Fair Lending—in the News and on Your Radar

By Andy Zavoina

It is not a huge surprise that enforcement actions have lessened from 2019 to 2020, but are we now beginning to see an uptick? From April 2019 to April 2020 there were more fair lending lawsuits than regulatory enforcement actions. During this period, according to Skadden, Arps, Slate, Meagher & Flom LLP, there were 20 actions filed—12 lawsuits and eight consent orders. Looking back to the prior administration, for the same period in 2015-2016 the Consumer Financial Protection Bureau (CFPB) filed 43 enforcement actions, of which 18 were lawsuits and 25 were consent orders.

Fair lending actions recently pale in comparison, but if there is only one suit, and it involves your bank, it is a big deal. As you will read, activity is increasing in these actions, but not to the point they were four and five years ago. Still, sometimes the best defense is a good offense, so all banks need to continue to train and monitor for fair lending issues and make any corrections necessary. The prudential regulators continue to actively examine consumer compliance issues—including fair lending—and these examinations will continue, COVID-19 or not, on-site and off.

Fair lending and HMDA

Fair lending is also closely related to your bank’s Home Mortgage Disclosure Act (HMDA) activity and records, if you are a HMDA bank. Fewer banks are with the increased exemptions now allowed under HMDA, but having that exemption is no reason to become complacent about fair lending. In fact, it may require banks that do not have the luxury of a loan application register to work harder to find a representative sample of loans for audit and internal testing.

Freedom Mortgage Corp. and HMDA problems. In June 2019, the CFPB issued a consent order against Freedom Mortgage Corp. for submitting erroneous HMDA data. The Freedom Mortgage Corp. order related primarily to the government monitoring information required for mortgage applications, including race, ethnicity, and sex information, which the CFPB claimed was reported incorrectly and on an intentional basis in many cases. When a lender’s GMI data are reported incorrectly, it can raise questions as to whether the lender may have fair lending problems.

Fair lending and CRA

The bank’s Community Reinvestment Act (CRA) rating is also influenced by its records in the fair lending area. CRA ratings can impact the bank’s ability to expand and if the rating is poor, it can draw attention to the bank’s inability to meet current customer needs. The Office of the Comptroller of the Currency’s (OCC) new rules pertaining to the CRA will impact national banks and federal savings associations, as their “assessment area” will now be more influenced by deposits and require inclusion of areas where deposits are sourced from. The effect is that low- and moderate-income areas will likely benefit from an increase in services available based on the deposits and this will translate into more loans being generated in those areas.

More than mortgages. Fair lending is about more than mortgage loans, though. While the CFPB and the federal prudential regulators did not enter into any public fair lending enforcement actions over the past year ending April 2020, the Department of Justice (DOJ) and the Department of Housing and Urban Development (HUD) reported settlements relating to redlining and automobile loan pricing. (The CFPB has announced some agreements since April, which will be discussed below.)

As banks begin adapting to a new normal, branch contraction may be planned and we may see more Loan Production Offices (LPOs) being established to fill new gaps. As it relates to fair lending, regulators have indicated that LPO locations may be relevant to redlining analyses in some circumstances. Unfortunately, we have little guidance in this area and even less with respect to LPO influences on fair lending analysis or indirect product lines. With respect to indirect product lines, key consideration may be the location of third-party originators, such as loan brokers and dealers the bank is doing business with. Management and business development should consider this in the future as location and products sold influence the market niche being served and this may be desirable to the bank, based on its own fair lending analysis.

Fair lending does not live in a vacuum and brings with it related, emerging issues such as Unfair, Deceptive or Abusive Acts or Practices (UDAAP) related to the COVID-19 pandemic. Much of the consumer compliance enforcement activity over the past year has included UDAAP with several enforcement actions also relating to the Fair Debt Collection Practices Act (FDCPA) and the Fair Credit Reporting Act (FCRA).

Paycheck Protection Program

Many banks participated in the Paycheck Protection Program (PPP), which has led to a number of compliance issues. Many banks immediately consider these commercial loans and not subject to consumer protections. But remember that Reg B and the Equal Credit Opportunity Act (ECOA) are not specific to only consumers. The PPP was a rushed product with up to 100 percent guarantees from the SBA, so the loans may have been perceived as having minimal risk to a lending bank. However, ECOA protections extend to all forms of commercial lending, including PPP lending. Perhaps as an early warning, the CFPB preemptively published a blog on April 27, 2020, emphasizing “the importance of fair and equitable access to credit for minority and women-owned businesses.” The posting discusses CARES Act, and reminds lenders, “Some examples of potential warning signs of lending discrimination based on race, sex, or other protected category include:

• Refusal of available loan or workout option even though you qualify for it based on advertised requirements• Offers of credit or workout options with a higher rate or worse terms than the one you applied for, even though you qualify for the lower rate
• Discouragement from applying for credit by the lender because of a protected characteristic
• Denial of credit, but are not given a reason why or told how to find out why
• Negative comments about race, national origin, sex, or other protected statuses”

As to the PPP, fair lending risks include the prioritization of existing customers for PPP loans. On the first day of PPP applications there was at least one lawsuit filed because of this internal requirement. In particular, some banks issued guidelines prohibiting loan applications from those who did not already have a loan account with the bank. To support the policy, the banks argued this minimized the burden on already short-staffing due to COVID-19, and compliance with know-your-customer rules was simpler and faster with established borrowers. But depending on the existing customer base, a customer-only policy may lead to a higher denial rate for minority-owned businesses, in clear conflict with ECOA and fair lending concepts. In addition, other underwriting requirements could create denial rate disparities and expose the -banks to further fair lending risk. The SBA rules did not include these requirements, but banks and lenders may have felt a loyalty to existing borrowers and certainly have a vested interest in seeing these borrowers succeed, especially where a limited pool of funds was available. The potential adverse impact on minority- or female-owned businesses was not considered and, understandably, there was no time for such planning. Lawsuits, however, see with hindsight and are 20/20 since it is easy later to ask, “what if.” It may take years to reach a final outcome of suits against JPMorgan Chase, Wells Fargo, Bank of America, and US Bank claiming those banks prioritized applications for large brands over small businesses, current borrowers over non-borrowers and larger loans over smaller. At face value a lender will say this makes good business sense and the small business borrower will say it is not what the PPP was designed for. Both are correct.

One lawsuit filed in Annapolis, Maryland, claimed the SBA’s PPP discriminated against women and minority-owned businesses by making the application criteria too broad. Another case in Baltimore, Maryland, was quickly put to rest as a judge ruled against small businesses in a discrimination-based case. There were also disputes over whether a business in bankruptcy could be disqualified from PPP loans.

PPP demographics. SBA PPP loan data is incomplete as the demographics were voluntarily submitted by the applicants and the rules were changing quickly as the program developed, even changing daily at times. An estimated 75 percent of borrowers did not provide demographic data.

Even with the incomplete data picture, once the SBA released loan data, the Center For Responsible Lending (CRL) analyzed it in an April 6, 2020, report and found roughly 95% of Black-owned businesses, 91% of Latino-owned businesses, 91% of Native Hawaiian or Pacific Island-owned businesses, and 75% of Asian-owned business “stand close to no chance of receiving a PPP loan through a mainstream bank or credit union.” One reason minority and small businesses were shut out was the lack of a preexisting banking or borrowing relationship. There were more issues cited by Forbes contributor Morgan Simon as it related to minorities being denied disproportionately, including:

1. Many formerly incarcerated business owners were not allowed to apply.
2. Banks set their own criteria for whom to lend to and were incentivized to choose large clients over small businesses.
3. People of color were disproportionately left out, but we don’t know exactly how many, as no government data was collected on loan recipients by race or gender.
4. 25% of the initial $2 trillion went to big business bailouts.
5. Only a tiny fraction was set aside for the most vulnerable businesses and communities.
6. Community Development Financial Institutions (CDFIs) — those institutions historically with the deepest relationships to vulnerable communities — were barely included.

Faced with incomplete SBA data, a recent study used testers who talked directly with banks about loans to help their small businesses stay open during the COVID-19 period and it found white applicants were treated better than Black applicants. This is an assertion that has been made for a long period prior to the pandemic we are all currently working through. The National Community Reinvestment Coalition (NCRC), found that Black and white matched-pair testers experienced different levels of encouragement to apply for loans, different products were offered and different information was provided by bank lenders – all of which is a fair lending concern. If you are not familiar with the testing technique, a majority applicant and a minority applicant contact the same bank or lender, and each provides the same qualifications leaving the major variable related to a protected basis such as race. The NCRC test included 17 banks in the Washington, DC, metro area.

Internal reviews. Whether you review incomplete SBA data or that from an organization which has an underlying agenda, there is always an analyst who cites discriminatory practices and disparities between demographics and the result is always one leading to a perceived need to improve fair lending efforts. Some questions a bank should ask and answer about a PPP or similar loan program include:

1. Whether marketing efforts are planned for the entire trade area, regardless of the minority composition of the area
2. Whether identical requirements imposed by the bank can vary, but are applied to similarly-situated applicants, and
3. Whether any rule prioritizes existing customers or borrowers and disproportionately affects minority-owned applicants.

CFPB officials have stated they will be reviewing bank Paycheck Protection Program lending patterns under ECOA and certainly more claims won’t be surprising. “The bureau is requesting information related to the PPP to address potential fair lending risk,” said Bryan Schneider, the CFPB’s head of the Supervision Enforcement and Fair Lending division, during a July 16 CFPB webinar.

In addition to the small business stimulus efforts the CARES Act provided with the PPP loan program, there were provisions for mortgage and student loan forbearance, credit reporting relief, and other areas which fall under the CFPB’s jurisdiction and have its attention. The CFPB has shifted during this COVID-19 period from full-scope to targeted exams, but remember it has authority over more than banks. The CFPB’s prioritized reviews allow examiners to take a more “real time” look at coronavirus-era lending and compliance with CARES Act provisions, Schneider said. There is a focus now on mortgage, auto and student loan servicing, debt collection (a continual leader in complaints) and credit reporting, and the CFPB can see what is actually happening at that time. “They have a risk-based approach to supervision, and when you look at where the risks are for consumers right now, it is not surprising the CFPB would focus on particularly the CARES Act,” said Rachel Rodman, a former top CFPB attorney.

The CFPB does not have any direct authority to review compliance with the CARES Act, but its authority under Dodd-Frank to enforce UDAAP will allow enforcement indirectly. The PPP can also be reviewed under ECOA although the CFPB has traditionally focused its efforts on this on the consumer protections.

Appropriate documentation of the business reasons for underwriting and pricing decisions will be a key factor in fair lending enforcement actions. The PPP provided little latitude in loan pricing, but the loan decision was the bank’s to make and that is where there is contention now. Second review programs should also be well documented. Many borrowers saw a chance to “get something for nothing” in the PPP and others wanted to greatly assist their businesses most of which are suffering. In many cases these contribute to the claims of discriminatory practices and a desire to still receive some “compensation” because most feel they deserve something, from someone.

Bank of America – disability

In a different matter, Bank of America has reached a proposed settlement in a case where the bank is alleged to have engaged in a pattern or practice of discrimination on the basis of disability. The case was initiated by Seth D. DuCharme, Acting United States Attorney for the Eastern District of New York, and Eric S. Dreiband, Assistant Attorney General for Civil Rights. This practice would be a violation of the Fair Housing Act (FHA).

The complaint alleges that between January 2010 and 2016, Bank of America had a policy to deny mortgage loans to adults with disabilities who were under legal guardianships or conservatorships. Additionally, the same policy applied to home equity loans from January 2010 to 2017.

Bank of America no longer has either policy. The terms of the proposed settlement require Bank of America to pay approximately $300,000 as compensation to the victims. It also requires the bank to maintain the new, non-discriminatory loan underwriting policy and train its employees on that new policy. The bank must include monitoring and controls with its loan processing and underwriting activities to ensure compliance with the FHA. It will have to report to the DOJ every six months for two years on its compliance with the terms of the settlement and on any new complaints received regarding any mortgage loan application denied to an adult applicant represented by a legal guardian or conservator.

Townstone – redlining

Another July 2020 case is the first in which the CFPB filed a complaint for redlining against a non-bank mortgage lender, Townestone Financial, Inc. The complaint alleges Townstone violated the ECOA, and the Consumer Financial Protection Act (CFPA) but interestingly not the FHA (both HUD and the DOJ enforce the FHA but the CFPB does not have that authority). The CFPB maintains that from January 2014 through December 2017, Townestone redlined majority and high-majority African American neighborhoods in the Chicago MSA. The CFPB refers to majority and high-majority African American neighborhoods as neighborhoods that are more than 50% and more than 80% Black or African American, respectively.

The allegations against Townstone include that it committed acts or practices directed at prospective applicants that discouraged, on the basis of race, prospective applicants from applying for mortgage loans. One new issue in this case is how it was done. As part of Townstone’s marketing efforts, it had a weekly radio show and podcast during which it made statements about African Americans and predominantly African American neighborhoods in the Chicago MSA that would discourage applications for mortgage loans from minorities. Additionally it was alleged that Townstone:

1. Made no effort to market to African Americans.

2. Did not specifically target any marketing toward African Americans in the Chicago MSA.

3. Did not employ an African American loan officer among its 17 loan officers.

4. Received few applications from African Americans—1.4% of its total applications– as compared to 9.8% for other lenders.

5. Received almost no applications from applicants for properties located in African American neighborhoods—five or six per year from high African American neighborhoods, with half of those from white, non-Hispanic applicants—and only between 1.4% and 2.3% of its applications came from applicants with regard to properties located in majority African American neighborhoods.

6. In contrast, peer lenders drew 7.6% to 8.2% of their applications from majority African American neighborhoods, and 4.9% to 5.5% of their applications from high African American neighborhoods.

More specifically on the podcasts, the CFPB addresses comments made in five broadcasts, including the following:

“For example, in a January 2017 episode of the Townstone Financial Show, during which Townstone marketed its services, the hosts discussed a now replaced grocery store in downtown Chicago that was part of the Jewel-Osco grocery store chain. Townstone’s CEO described “[having] to go to the Jewel on Division. . . . We used to call it Jungle Jewel. There were people from all over the world going into that Jewel. It was packed. It was a scary place.”

“Jungle”—a word that may be used as or understood to be a derogatory reference associated with African Americans, Black people, and foreigners—and saying that the grocery store was “scary” would discourage African-American prospective applicants from applying for mortgage loans from Townstone; would discourage prospective applicants living in African-American neighborhoods from applying to Townstone for mortgage loans; and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in African-American neighborhoods.”

Another example cited in the complaint is that “In a June 2016 episode of the Townstone Financial Show, before discussing the mortgage-lending services that Townstone could provide to police officers and others, Townstone’s CEO stated that the South Side of Chicago between Friday and Monday is “hoodlum weekend” and that the police are “the only ones between that turning into a real war zone and keeping it where it’s kind of at.” Chicago’s South Side refers to the southern neighborhoods in the City of Chicago and is majority-African American, with about 489,000 African Americans currently living there.

A mortgage lender and self-described real-estate expert referring to Chicago’s South Side as “hoodlum weekend” would discourage prospective applicants living in the South Side from applying to Townstone for mortgage loans and would discourage prospective applicants living in other areas from applying to Townstone for mortgage loans for properties in this particular African-American community because the comments indicate that Townstone’s CEO, speaking during an official Townstone marketing program, believes that the area’s defining characteristic is that it is dangerous and full of criminals. Moreover, because the statement is disparaging toward a majority-African-American area, African-American prospective applicants throughout the Chicago MSA would also be discouraged from applying for mortgage loans from Townstone.” Additional examples are cited in the complaint.

Reg B states in § 1002.4(b) that “A creditor shall not make any oral or written statement, in advertising or otherwise, to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.” There are other potential legalities that involve Townstone as a non-bank, but a bank would not have such defenses. Suffice it to say that the Townstone case reminds lenders to be careful about what they say. Banks have for years paid careful attention to printed advertisements and scripts used in other media such as radio and television. Townstone reminds us that podcasts, which may seem more like people just talking, need well chosen words as well. The same advice would apply to any other social media a bank my use, such as Facebook Live.

Townstone was meeting the credit needs in the MSA’s majority-white neighborhoods.

Remedies requested in the CFPB’s complaint include fair lending compliance, no further recurrences of the discriminatory conduct, adoption and maintenance of policies and procedures for compliance, and monetary relief, damages and restitution under ECOA and the CFPA as well as a civil money penalty and the costs for this action. The amount or formula to calculate monetary payments was not specified.

Fair servicing

State and federal agencies have urged banks and others servicing mortgage loans (and other credit products) to work with borrowers during the COVID-19 pandemic. The CARES Act requires mortgage servicers and others to provide temporary forbearance for all loans that are federally insured, federally guaranteed, or purchased or securitized by Fannie Mae and Freddie Mac. The prudential regulators and the CFPB have urged banks, “to consider prudent arrangements that can help ease cash flow pressures on affected borrowers, improve their capacity to service debt, and increase the potential for financially stressed borrowers to keep their homes.” Many borrowers require help in making mortgage loan payments and the forbearance programs, extensions and modifications have provided assistance to millions of troubled borrowers.

There has been a lack of guidance as to how far these modifications and extensions can go, but it may be safe to consider much of this as a disaster relief program and allowances will be made. But how far is too far? No agency has encouraged unsafe or unsound practices and certainly no violations of any consumer protection laws. Common sense and a respect for the spirit and intent of the laws and regulations will go a long way as banks react to the changing and extending conditions COVID-19 has presented.

Reg B requires equal treatment of applicants and borrowers throughout the life of the loan. That certainly includes the servicing of these loans, but we do not know to what extent in black and white terms. The FHA “applies only to the ‘sale or rental of a dwelling’ or lending in connection therewith,” making its impact unclear. Nonetheless, ECOA and Reg B will apply. Does this mean a bank should be reviewing its programs to assist financially impacted borrowers to ensure the bank marketed these programs to all its borrowers, and tracked the acceptance rates?

Fair servicing considerations. Banks should carefully document what the regulatory agencies and other authorities have proposed, said to consider, and have said not to do. Create a resource file substantiating the various programs employed to assist borrowers and depositors.

1. Document the programs employed and especially any discretion allowed on the part of bank staff. Program features, including eligibility criteria, should be clear and applied consistently.

2. Establish controls, second looks and reviews of case-by-case exceptions.

3. Document the assistance levels that are to be provided to all customers to ensure uniformity.

4. Proactively communicate with all borrowers (and depositors if appropriate) about relief programs available to them. This may include statement stuffers, website and social media postings, and other advertising the bank does. Ensure the wider market is reached. If any targeted efforts are made, indicate why and the target demographics or conditions.

5. Carefully craft any applications for participation. In some cases a financial hardship may have to be proven and documented. The bank may find itself getting medical information as a family member or borrower is now ill or recovering, may have excessive medical bills from treatments, may be on public assistance, etc. and some of this information may be protected and even prohibited if the application is improperly worded. Develop the applications and scripts to introduce the programs.

6. Expanding on the mention of medical information, the FCRA and Reg V prohibit banks and servicers from requesting, obtaining, or using medical information in a credit decision or an evaluation of the borrower’s continued eligibility for credit. Customers’ statements may inadvertently disclose otherwise prohibited information.

Use of this unsolicited medical information in making a credit decision (which may be deemed applicable in these programs) is permissible only if:

(a) the information is the type of information routinely used in making credit eligibility determinations (such as a delinquency),

(b) the bank uses the medical information in a manner and to an extent that is no less favorable than it would use comparable information that is not medical information in a credit transaction (delinquent medical debt is treated the same as other delinquencies), and

(c) the bank does not take the consumer’s physical, mental, or behavioral health, condition or history, type of treatment, or prognosis into account as part of any such determination.

The FCRA also requires lenders and servicers that obtain a credit report containing medical information to keep that information confidential.

7. Consider extenuating circumstances involving the borrower and customer. Are they required to quarantine, socially distance or otherwise restricted as to meeting with your staff? Consider the additional assistance which may be provided and creative ways to assist the customer such as via drive-up facilities, e-banking, appointment to enter a branch safely, video calls where possible, etc.

8. All of the above will require training of both bank staff, and of those the bank must answer for –vendors acting on your behalf.

At the end of the day, document, document, document. What was offered, to which customers, how were they selected, were all customers reached regardless of any protected basis, location or income bracket? What offers were accepted and which were not? Were programs refined to increase acceptance is possible? As the programs progress, is the bank communicating with borrowers and monitoring the servicing of the loans and mortgages for compliance? Has the bank analyzed the acceptance of its efforts or tried to make any conclusions as to these fair servicing efforts?

New data collection? The Dodd-Frank Act is 10 years old. One of its provisions requires data gathering at banks for small business loan applications including those from minority applicants and women. This has not happened under the current or former administration and will be both burdensome for lenders difficult to implement.

The CFPB agreed to publish its proposed regulation on small-business data collection as part of a settlement with the California Reinvestment Coalition in early 2020. The COVID-19 pandemic may be slowing those efforts, but that is temporary. Could the recent actions and attention to inequities in the PPP program bring this to the forefront? It is already claimed that such recordkeeping would answer many of the questions and concerns faced as a result of the sketchy data on the PPP program.

The CFPB’s RFI

If you believe change is due in the fair lending area, you are not alone. The CFPB issued a Request for Information (RFI) on July 28, 2020, seeking input on how to best update regulatory issues which expand access to credit for everyone. Some issues in particular that the Bureau would like to see addressed by comments include:

• Disparate treatment analysis

• Assisting more limited English proficiency borrowers

• Better meeting the needs of small businesses, especially minority- and women-owned

• Addressing adverse action notice requirements.

Details are at https://www.federalregister.gov/d/2020-16722