April 2021 OBA Legal Briefs

• Third round of stimulus payments (EIP3)
• Reg B has expanded: What you need to do
• UDAAP U-turn
• More reasons to watch the Bureau

Third round of stimulus payments (EIP3)

By Pauli D. Loeffler

Basics. To receive the third stimulus payment (“IEP3”) the payee(s) must be U.S. citizens or U.S. resident aliens. The payee must have a social security number issued by the Social Security Administration. This means that a person who has an Individual Taxpayer Identification Number (“ITIN”), 9-digit number, beginning with the number “9” issued by the IRS isn’t eligible. If the payee died before January 1, 2021, s/he is not eligible for the third stimulus (EIP) payment.

Deceased payee. If the payee died before January 1, 2021, return the direct deposit. If it is a paper check do not cash or deposit the paper check. Like the first and second stimulus payments, it is the customer’s responsibility (not the bank’s) to return any funds attributable to a deceased joint payee or dependent.
Taxes, child support, garnishment, and offset. The third stimulus payment will not be reduced for federal taxes owed nor will state tax and child support intercepts apply. On the other hand, direct deposits do not have the two XXs identifying them as subject to the Garnishment of Federal Benefits rule, which means the bank does not include them in determining the protected amount under the rule. Direct deposits of EIP3 payments are subject to garnishment and child support levies. If the account is open and overdrawn, the bank may use offset to collect the overdrawn amount.

Closed accounts. If the account is closed, the bank cannot reopen it to accept the direct deposit. Return the ACH entry using R02 (account closed). The customer will receive a paper check sent to the address used on the 2019 or 2020 tax return. We get a lot of questions regarding re-opening a charged off account that receives a direct deposit. I know how tempting this is, but the short and definitive answer is an adamant “No!”

What if the account was administratively closed because it hit a zero balance? This is problematical if the customer does not have another account (deposit account or loan) since the bank needs to perform CIP and the existing customer exception is not available. Often the customer is not aware that the account will automatically close if the balance is zero and had no intention to close the account. The best way to avoid the problem is to set the automatic closure to occur a few days after the balance reaches zero when the customer has not indicated his/her intention to close the account. A more time-consuming measure is to check for zero balance accounts daily and contact the customer to find out if s/he intended to close the account, and if not, override its automatic closure.

Reg B has expanded: What you need to do

By Andy Zavoina

Background

OK, so you heard the Consumer Financial Protection Bureau announced an interpretive rule on Regulation B. Anti-discrimination efforts are front and center for the CFPB and, it appears, for the new administration now supporting it. In a nutshell the interpretation says the prohibition against sex discrimination under the Equal Credit Opportunity Act and its implementing Reg B includes protection against any discrimination based on sexual orientation or gender identity. This includes discrimination based on actual or perceived nonconformity with sex-based or gender-based stereotypes and discrimination based on an applicant’s “associations.” We will explore what this all means in a moment.

This may seem, at first blush, like much ado about nothing because discrimination in your bank is a non-issue. There is none. But that is not necessarily the case here. Not that you have any lending discrimination happening, but that there are things to be done because of this interpretation. This ruling is not intended to be a guidance document that would qualify as advice and not be binding. It is an interpretation of the law that says, “this is how we read the regulatory requirements and you must conform with them.” You should recognize that you now have a task list resulting from this interpretive rule and it is already in effect. More on the task list further in this article.

This is not a “new” interpretation and it is not coming from nowhere. It has roots in both prior interpretations and in legal cases that have gone as far as the Supreme Court (SCOTUS). In 2016 the CFPB responded to an inquiry from SAGE, the Services & Advocacy for GLBT Elders. SAGE says it “stands proudly with the LGBT pioneers across the country who’ve been fighting for decades for their right to live with dignity and respect.” SAGE queried the CFPB about sex discrimination resulting from sexual orientation and gender identity.

The CFPB opined and concluded that ‘‘the current state of the law supports arguments that the prohibition of sex discrimination in ECOA and Regulation B affords broad protection against credit discrimination on the bases of gender identity and sexual orientation, including but not limited to discrimination based on actual or perceived nonconformity with sex based or gender-based stereotypes as well as discrimination based on one’s associations.” The CFPB said further that it was monitoring legal developments and that ECOA and Reg B would reflect the precedents and interpretations of sexual discrimination laws. This position, which the CFPB took five years ago, is the same as it is taking now.

Fast forward to June 2020 and a case before the Supreme Court, Bostock v. Clayton County, Georgia, which involved sex discrimination under Title VII of the Civil Rights Act of 1964. Specifically, this was the case of an employer who allegedly fired a long-time employee simply for being homosexual or transgender. SCOTUS relied on three key findings to reach its decision: (1) Sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex; (2) Title VII’s language requires sex to be a “but for” cause of the injury but need not be the only cause; and (3) Title VII’s language covers discrimination against individuals, and not merely against groups. SCOTUS basically connected the dots as it stated in its opinion, “An employer who fires an individual for being homosexual or transgender fires that person for traits or actions it would not have questioned in members of a different sex. Sex plays a necessary and undisguisable role in the decision, exactly what Title VII forbids.“ These three points, emphasized by the opinion, easily translate from this employment case to credit situations under ECOA and Reg B. In the Federal Register announcing this interpretation the CFPB said, “It is well established that ECOA and Title VII are generally interpreted consistently.”

The CFPB said it would monitor legal actions and react accordingly. The language from SCOTUS is very much in alignment with the interpretation the CFPB offered in 2016 and it certainly fuels this new CFPB interpretation which essentially expands Reg B protections. The reality is, ECOA and Reg B have not expanded, but the CFPB is making clear that sexual orientation and identification are included as prohibited bases under sex discrimination. No one questions a woman dressing as a woman. But if a man does so, it may be viewed in a derogatory manner because he is not a woman – and that stereotyping is based on his sex.

Details

The CFPB’s interpretive rule intended to clarify that ECOA and Reg B prohibitions against discrimination on the basis of sex include discrimination based on sexual orientation and/or gender identity. The rule was considered effective on the date of publication in the Federal Register, March 16, 2021.

ECOA prohibits discrimination based on sex. It does not require that it be a primary issue in any complaint or action to be an issue, it can be a contributing factor in any case. Sex discrimination is often thought of as an “all males” compared to “all females” problem such as having a higher denial rate for female applicants who are similarly qualified to approved male applicants. But sex discrimination also applies at an individual level. Additionally, discrimination may be based not only on the characteristics of an applicant but also on the characteristics of a person with whom an applicant associates.

The CFPB “owns” Reg B and is therefore the only entity empowered to provide binding interpretations. It clarifies in this rule that under Reg B: (1) sexual orientation discrimination and gender identity discrimination necessarily involve consideration of sex; (2) an applicant’s sex must be a ‘‘but for’’ cause of the injury, but need not be the only cause; and (3) discrimination against individuals, and not merely against groups, is covered. The Bureau also clarifies that ECOA’s and Reg B’s prohibition against sex discrimination encompasses discrimination motivated by perceived nonconformity with sex based or gender-based stereotypes, as well as discrimination based on an applicant’s associations.

Fact One: Sexual orientation discrimination and gender identity discrimination do involve consideration of sex, which would violate Reg B on a prohibited basis. If a male applicant is denied a loan in whole or in part because that male applicant is attracted to other males, that is discriminatory based on sex, because a female who is attracted to males would be approved. The male attracted to other males is “failing to fulfill traditional sex stereotypes.”

If a loan workout specialist declines the forbearance application on a home loan of a transgender borrower who was identified as male at birth but who now identifies as female, but a similarly qualified applicant who was identified as female at birth and continues to identify as female was approved, the specialist will be seen to have discriminated against the transgender borrower because the bank accepted the female applicant who was identified as female at birth and continues to do so. In these examples, the individual applicant’s sex plays an unmistakable and impermissible role in the credit decision and thus this conduct constitutes discrimination on the basis of sex in violation of ECOA and Regulation B.

The interpretation from the CFPB above is consistent with the SCOTUS conclusion in Bostock that “it is impossible to discriminate against a person for being homosexual or transgender without discriminating against that individual based on sex.” (Sometimes this is easier to grasp if in your mind you consider “gender” or “gender identification” in place of “sex.” This may also assist students when they are being trained.)

Fact Two: Basing any decision on a loan under consideration or already funded in whole or in part on the sex of a person (or gender identification) is discriminatory and it does not matter if sex was a primary or secondary factor, it simply may not be any factor in a decision.

As a practical example, when the bank rejects an applicant on the basis of that person’s being gay or transgender, there could be two contributing factors in the decision and while both the person’s sex and something else, a collateral issue, contributed to the decision, the fact that just one factor was based on a prohibited basis attaches the liability of discrimination to the decision if collateral in this example alone would not have been enough. Having been on the loan desk for many years I have been in the discussion where it is stated, “I don’t like this, but this alone is not reason to deny it, and I don’t like that, but that alone is not reason enough to deny it, but if you consider this and that, deny the loan.” If either “this” or “that” are reflective of a prohibited basis, it may deemed discriminatory.

Fact Three: The rules against sex discrimination apply to individuals and not just situations which apply to all men, or all women.

A case in point is a lender who denies a loan request from any woman he feels is not feminine enough. Perhaps he objects to her short hair, “manly” gestures or that she is dressed in a man’s suit. The lender applies this treatment universally however, in that he also denies any man he feels is too feminine. Perhaps the man wears makeup, uses feminine gestures, or has long fingernails. The lender is treating each group equally and may justify the actions saying it is equal treatment. But in fact, each group was discriminated against in violation of ECOA and Reg B based on sex and the lender’s perception or stereotype of what is acceptable. Going back to Lending 101, many of us were taught the five Cs of credit – character, capacity, capital, collateral, and conditions. Do not confuse the lender’s stereotyping with character. Character is addressing the credit rating and a person’s desire and determination to pay their bills in a timely manner. In this example the lender is not mitigating a bias by applying misguided logic against both men and women, he is compounding the problem by doubling it. As noted by the CFPB, “It is no defense for a creditor to argue that it is equally happy to reject male and female applicants who are gay or transgender because each instance of discriminating against an individual applicant because of that individual’s sex is an independent violation of ECOA and Regulation B.”

In this example, the point is that applying a bias equally may be equal treatment, but that does not make it non-discriminatory.

Fact Four: The last example provided in the interpretive rule addresses discrimination based on sex, when the discriminatory acts are based on gender specific stereotypes like what I used immediately above. Generally speaking, these are stereotypes related to gender identity and/or sexual orientation, as well as discrimination based on an applicant’s associations.

Specifically, an example could include a transgender applicant wanting a small business loan for a nursery. Jane, the small business lender received an email from John Smith on this topic which started with “happy spring to you,” and she replied with an invitation to visit her office and discuss the loan request. When John appeared for the meeting he was not dressed as a man and he was interested in setting up a daycare and nursery in town. Jane sent John home to change without discussing the loan. Her actions were based on John’s dress and told him that this was inappropriate attire — it was not suitable for the bank or for such a loan request. The CFPB views this as discriminatory stereotyping and supports that opinion with various court cases including EEOC v. Boh Bros. Constr. Co. as well as others cited in the Federal Register document finalizing this rule.

In the Boh Bros. case the company settled with the EEOC for $125,000 resulting from the actions of a superintendent against a worker on a bridge construction project. The 2009 case included verbal abuse, taunting gestures of a sexual nature, and the superintendent exposing himself. He admitted he harassed Woods, the plaintiff, because he thought Woods was feminine and did not conform to his gender stereotypes of “rough iron workers.” There was also a jury trial in which Boh Bros was found to have permitted a hostile work environment and sexual harassment, which is illegal sex discrimination under Title VII. Again, the CFPB relies on the similarities between Title VII and ECOA. It is also worth noting Woods was awarded $451,000 by the jury for back pay and compensatory and punitive damages. The district court reduced this to $301,000 because of statutory limits. One point here is that you can easily substitute the lender–bank relationship for the superintendent–company relationship.

Actions based on stereotyping a person must be discouraged when the stereotyping is based on a prohibited basis, the same as actions based on the associates or associations of that person. Discrimination based on sex, including sexual orientation and/or gender identity, of the persons with whom the individual associates is prohibited. The rule tells us, a “creditor engages in such associational discrimination if it, for example, requires a person applying for credit who is married to a person of the same sex to provide different documentation of the marriage than a person applying for credit who is married to a person of the opposite sex.”

Task List

The interpretive rule was published on March 16, 2021, and was “effective” that day. Because it was not a change to Reg B there was no comment period required or offered. The CFPB has simply said this is how the rule needs to be viewed, and we can expect that it will be enforced based on this.

Does your bank regurgitate Reg B in any policies or procedures? It may be time to review any that may and determine if edits are necessary to demonstrate not just a willingness to comply, but an affirmation to do so. Consider reviews of policies, procedures and actual practices, underwriting guidance, credit scoring and compliance monitoring systems.

Will training documents, presentations, videos, or computer-based training require edits to include the points made by the interpretive rule? Remember that Reg B and the ECOA apply to all phases of your loans, consumer, commercial and real estate, whether they are in the advertising or application stage, payment period or past due and in a workout status. Being preemptive is more desirable than being reactive after an exam criticism or a complaint. Having loan staff aware of the rule immediately is best. The four Facts and Examples above may be excellent training points. Likewise, it is recommended that Compliance use any opportunity to mention the rule and the bank’s reactions to senior management and the board to ensure they are aware of what has been clarified and how the bank has ensured implementation.

The CFPB referenced President Biden’s Executive Order 13988, “Preventing and Combatting Discrimination on the Basis of Gender Identity or Sexual Orientation.” President Biden’s order mandates all federal agencies must fully enforce Title VII and other laws that prohibit discrimination based on gender identity or sexual orientation. Federal agencies must take all lawful steps to make sure that federal anti-discrimination statutes that cover sex discrimination also prohibit discrimination based on sexual orientation and gender identity.

UDAAP U-turn

By Andy Zavoina
On March 11, 2021 the CFPB announced it was rescinding its “Statement of Policy Regarding Prohibition on Abusive Acts or Practices,” originally published January 24, 2020. Many in banking, regulation and even Congress repeated the same question, “what is abusive, how does it differ from or supplement the rest of UDAAP and how is it enforced?” The 2020 policy statement clarified this, as you will see below. This 2021 rescission was effective March 19, 2021.

CFPB Acting Director Dave Uejio shared in a blog post that he planned to reverse policies of the Trump Administration “that weakened enforcement and supervision,” some of which included rescinding public statements proclaiming a relaxed approach to enforcement. The UDAAP policy statement was one of the first to be reversed.
We are back to what the Dodd-Frank Act considers as abusive:

• Materially interferes with someone’s ability to understand a product or service;
• Takes unreasonable advantage of someone’s lack of understanding;
• Takes unreasonable advantage of someone who cannot protect themselves; and
• Takes unreasonable advantage of someone who reasonably relies on a company to act in their interests.

The 2020 policy statement outlined three principles which were to guide the CFPB in supervisory and enforcement actions pertaining to abusive acts or practices:

1) The CFPB would focus on citing conduct as abusive in supervision and challenging conduct as abusive in enforcement if it concluded that the harm to consumers outweighed the benefits.

2) The CFPB would generally avoid challenging conduct as abusive where an alleged violation relied on all or nearly all the same facts as those deemed unfair or deceptive. This helped prevent piling on violations for the same thing. Where an act or practice was deemed abusive, the CFPB intended to be very clear and show the legal analysis of the claim and what separated these actions from others.

3) Generally, the CFPB would not seek monetary remedies for abusive acts or practices if the bank had made a good faith effort to comply with the law and a reasonable interpretation of it.

If your bank revised any UDAAP policies or procedures based on this guidance, be aware that Acting Director Uejio has rescinded it and adjustments to the materials noted and training the bank conducts may need adjustments as well. Adjustments may be guided based on the reasoning by the CFPB. The rescission was done for several reasons as noted in the Federal Register on March 19, 2021.

The CFPB said it reviewed what had happened since the 2020 policy went into effect and concluded that the principles in the statement “do not actually deliver clarity to regulated entities” and in actuality may, “afford the CFPB considerable discretion in its application and uncertainty to market participants.” Not citing a violation as abusive because it may overlap with an unfair or deceptive conduct or based on other principles in the statement “has the effect of slowing the CFPB’s ability to clarify its statutory abusiveness authority by articulating abusiveness claims as well as through the ensuing issuance of judicial and administrative decisions.”

By only citing conduct as abusive in exams or in enforcement actions, if the CFPB concludes that the harm to consumers from the conduct outweighed the benefits, the CFPB would be applying the abusiveness standard “differently from the normal considerations that guide the CFPB’s general use of its enforcement and supervisory discretion.”

If the CFPB fails to apply the full scope of the statutory standard according to the statement, it “has a negative effect on the CFPB’s ability to achieve its statutory objective of protecting consumers from abusive practices.” The policy of not seeking civil money penalties for abusive acts or practices “is contrary to the CFPB’s current priority of achieving general deterrence through penalties and other monetary remedies and of compensating victims for harm caused by violations of the Federal consumer financial laws through the CFPB’s Civil Penalty Fund.” Similarly, not citing conduct as abusive when that conduct is also unfair or deceptive “is contrary to the CFPB’s current priority of maximizing the CFPB’s ability to assert alternative legal causes of action in a judicial or administrative hearing.” The CFPB plans to continue its practice of considering the factors that it typically does in using its prosecutorial discretion.

The policy standard was not required and “stated an intent to refrain from applying the abusiveness standard even when permitted by law.” If Congress intended to limit the CFPB’s authority to fully apply the abusiveness standard, it could have prescribed a narrower prohibition but did not. The Dodd-Frank language “provides sufficient notice for due process purposes.”

Many saw the “friendlier” CFPB as a regulatory agency that was not always confrontational and considered the industry while protecting consumers. However, the phrase above, “…the CFPB’s current priority of achieving general deterrence through penalties and other monetary remedies and of compensating victims…” brings us back to the CFPB’s early years and regulation by enforcement. That said, there may have been more written about the confusion surrounding “abusive” behavior than it being used in enforcement actions. It simply has not been cited much at all.

Considering the changes to Reg B and to UDAAP, compounded by the increased enforcement activity we expect to see from the CFPB, banks may consider a full review of policies, procedures and training materials involving Reg B/ECOA, UDAP/UDAAP and the bank’s general compliance management program for needed updates. After the tremendously disruptive year-plus that banks have had to work under pandemic conditions, it would be easy to see how some tasks went undone. The new administration is moving fast in our industry, the CFPB is leading the way to install changes and the prudential regulatory agencies will follow suit to some degree.

More reasons to watch the Bureau

By Andy Zavoina

Acting CFPB Director Uejio has advised Bureau personnel that there are new priorities for the Bureau’s Supervision, Enforcement, and Fair Lending Division (SEFL), specifically involving COVID-19 relief to consumers and racial equity. He believes that strong oversight can have a meaningful impact on pandemic recovery. One of his directives to CFPB staff is to “always determine the full scope of issues found in its exams, systemically remediate all of those who are harmed, and change policies, procedures, and practices to address the root causes of harms.” Uejio indicated this change includes active Prioritized Assessments. Another directive was for “SEFL to expedite enforcement investigations relating to COVID-19” in order to send a “message that violations of law during this time of need will not be tolerated.”

Any bank taking specific actions, or not taking actions, on credit reporting, overdrafts, PPP loans, loan extensions or forbearance programs, and loan servicing may want to review their actions and be prepared to support the position taken with customers. As to racial equity, Uejio indicated that he plans to expand scheduled exams and add new ones to “have a healthy docket intended to address racial equity” and that fair lending enforcement will serve as “a top priority” at the CFPB. The CFPB will look for opportunities “to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.”

Related to future acts, the CFPB will resume supervising lenders for compliance with the Military Lending Act (MLA). In 2018, then Acting Director Mick Mulvaney had the CFPB stop its supervisory MLA activities because he believed that by virtue of the law itself, the CFPB did not have explicit statutory authority for this. Director Kathy Kraninger, who followed Mulvaney, held this same position, even providing Congress with text for a bill which would rectify this. That request was never acted on with many Democrats maintaining it was not necessary to enforce the law. Acting Director Uejio has already started to reverse “policies of the last administration that weakened enforcement and supervision.” He has taken action not only on the MLA, but on Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). He has already had the CFPB “rescind [seven] public statements conveying a relaxed approach to enforcement of the laws in our care.” https://www.consumerfinance.gov/about-us/newsroom/2020-hmda-data-on-mortgage-lending-now-available/
It’s clear from these early actions that banks can expect a more consumer-centric, proactive CFPB. It is a safe assumption that Uejio is not operating in a vacuum and is in contact with the nominated director, Rohit Chopra. Chopra told a Senate panel during confirmation hearings that he plans to prioritize the enforcement of fair lending laws and scrutinize the large technology companies wanting to break into the financial services industry. He currently is a commissioner at the Federal Trade Commission, where he has campaigned for stricter consumer privacy rules and enforcement penalties. He helped establish the CFPB and worked under Senator Elizabeth Warren while doing so. He was an ombudsman for student loans when Richard Cordray was the first CFPB Director.