Redlining, expanded CFPB oversight, and fair loan enforcement
Fair Lending laws have been around for decades, but have come under greater scrutiny in recent months, in keeping with society’s sensitivity to issues of racial justice, national origin/immigration, sexual orientation and gender identity, among others. There has also been increased scrutiny in the world of corporate governance, with companies setting up diversity, equity and inclusion departments and employing environmental, social and governance programs. In fact, to list on the Nasdaq stock exchange, U.S. issuers must disclose that they have at least one director who is racially minority and female or a member of the LGBTQ community, or explain why they don’t. (NASDAQ Rule 5605(f)).
The degree to which regulators enforce fair lending laws can vary depending on the administration in place, and the Biden administration is no exception. The Biden administration is only a year old, so there hasn’t been much time for new litigation, but policymakers appointed by President Biden have issued statements signaling what the banking industry may be up against. expect, including changes in the Trump administration.
This two-part series of articles will explore some of the most high-profile initiatives of the Biden administration. This first article will examine the renewed emphasis on combating the practice of redlining and the expanded watchdog role of the Consumer Financial Protection Bureau (CFPB). The second article will examine efforts to re-codify the Fair Housing Act (FHA) Discriminatory Effects Standards and enforce the Office of the Comptroller of the Currency (OCC) Final Rule of December 14, 2021 regarding home data. Community Reinvestment Act (CRA). – collection requirements.
Justice Department announces ‘anti-redlining initiative’
On October 22, 2021, United States Attorney General Merrick Garland announced that the Department of Justice (DOJ) would partner with the CFPB, OCC, local U.S. attorneys, and state attorneys general to prosecute violations of fair lending by banks, with a particular focus on redlining (i.e. the inability to lend to minority communities, based on race and national origin). He plans to use the offices of US attorneys, who, as boots on the ground, would be well placed to conduct investigations locally. More precisely, Mr. Garland said at a press conference:
“Discrimination in lending goes against the fundamental promises of our economic system. When people are denied credit simply because of their race or national origin, their ability to participate in the prosperity of our nation is virtually eliminated. Today, we are committed to addressing modern redlining by making much more robust use of our fair lending authorizations. We will spare no resources to ensure that federal equity lending laws are strictly enforced and that financial institutions provide equal opportunity for every American to obtain credit.
Underscoring the importance of this issue to the Biden administration, the press release announcing the program added, “The new initiative represents the department’s most aggressive and coordinated enforcement effort to combat redlining, which which is prohibited by the Fair Housing Act and the Equal Credit Opportunity Act. .” To make sure the DOJ’s message was absolutely clear, Civil Rights Division Assistant Attorney General Kristen Clarke noted that the initiative “should send a strong message to banks and lenders that we will hold them accountable while that we are working to combat racial discrimination and national origin”. – loan-based lending practices.
Along with the announcement, Mr. Garland added that on October 22, 2021, the DOJ sued Trustmark Bank for redlining in the U.S. District Court for the Western District of Tennessee under the Equal Credit Opportunity Act (ECOA) and the FHA. The lawsuit alleged that Trustmark pledged to draw a red line on discrimination in the predominantly black and Hispanic neighborhoods of Memphis, Tennessee, from 2014 to 2018.
The Trustmark lawsuit is similar to the one filed by the DOJ against Cadence Bank in the U.S. District Court for the Northern District of Georgia on August 30, 2021, also alleging FHA and ECOA violations. In that earlier action, the government claimed Cadence engaged in redlining from 2013 to 2017 by failing to lend in neighborhoods inhabited primarily by minorities.
Historically, redlining actions have been brought against banks. However, the CFPB has indicated that it will also pursue redlining litigation against non-bank mortgage lenders, such as that brought by the CFPB (under the Trump administration) against mortgage lender Townstone Financial, Inc., on July 15, 2020, in the United States District Court for the Northern District of Illinois – the first lawsuit ever brought against a mortgage lender for redlining.
Although the majority of this type of fair lending litigation is brought by federal authorities, the ECOA and FHA provide a private right of action against creditors who discriminate against plaintiffs. (To see Cleveland v. Hunter, 2016 US Dist. LEXIS 175262, at *6 (ED Cal. Dec. 16, 2016) and Brown-Younger v. Mosen, 2011 US Dist. LEXIS 126852, at *4 (D. Nev. Oct. 28, 2011) (citing 42 USC § 3613(a)(1)(A)).)
Class action lawsuits may also be brought under these Fair Lending Acts (to see Fair house. CT. of Cent. Ind. vs. Rainbow Realty Group., 2020 US Dist. LEXIS 53084, at *18-19 (SD Ind. Mar. 27, 2020)). However, these collective disputes are faced with significant costs, in particular obtaining a class certification (to see Wal-Mart Stores, Inc. vs. Dukes564 US 338, 356 (2011); In re Countrywide Fin. Corp. Dead. Lending Practices Dispute., 708 F.3d 704, 709 (6th Cir. 2013); and ID. at 710; OK. Adkins vs. Morgan Stanley307 FRD 119, 146 (SDNY 2015)), as well as the inclusion of arbitration agreements in many loan documents that prevent the filing of a class action or the continuation of a class action (to see Pitchford v AmSouth Bank, 285 F. Supp. 2d 1286, 1292 (MD Ala. 2003)).
The oversight role of the CFPB
The Dodd-Frank Wall Street Reform and Consumer Protection (DFA) Act directed the CFPB to implement regulations governing the collection of small business loan data. Specifically, Section 1071 of the DFA amended the ECOA to require financial institutions to compile, maintain, and submit to the CFPB certain credit application data for women, minorities, and small businesses. According to the CFPB, Congress enacted Section 1071 to:
Facilitate enforcement of fair lending laws; and
Enable communities, government entities and creditors to identify business and community development needs and opportunities for women-owned, minority-owned and small businesses.
On September 1, 2021, the CFPB published a proposed rule amending Regulation B to implement the changes made to the ECOA by Section 1071 of the DFA, including the requirement for financial institutions to collect and report CFPB data on credit applications for small businesses, including those owned by women or minorities. Information collected will include information on the type of credit small businesses are seeking and obtaining, demographic information about small business owners, how applications are received, and application results.
The CFPB proposes to use the definitions of “small business” set forth in the regulations of the Small Business Act and the Small Business Administration (SBA). However, the CFPB’s proposed definition will also take into account whether the business had $5 million or less in gross annual revenue for the prior fiscal year. The CFPB is seeking approval from the SBA to implement the Alternative Small Business Size Standard pursuant to the Small Business Act.
For banks that have more than $10 billion in assets, the CFPB is also authorized to enforce the Unfair, Deceptive, or Abusive Acts or Practices Act (UDAAP), which is part of the DFA. Given the ambiguity of the term “abusive,” the Trump administration issued a policy statement limiting its meaning and explaining that acts or practices labeled as “unfair” or “deceptive” also could not be considered. as abusive. Conversely, current CFPB director Rohit Chopra and his predecessor, acting director Dave Uejio, both support a broader interpretation — which could lead to increased penalties and penalties.
Finally, it is possible, if not foreseeable, that prudential regulators such as the OCC, the Federal Reserve and the Federal Deposit Insurance Corporation may monitor the safety and soundness of smaller banks based in part on the fact that they engage in unfair, deceptive, and/or abusive acts and practices. Although enforcement actions cannot be formally taken under the UDAAP for these small banks, a monitoring mandate can be imposed in the interests of safety and soundness; these prudential regulators have a virtual plenary authority to supervise their banks.
Coming in March: the second in this series of articles will take a closer look at efforts to re-codify the FHA Discriminatory Effects Standards and enforce the OCC’s final rule of December 14, 2021 regarding collection requirements CRA data.