How community banks can prepare for CFPB changes

With a new CFPB director and heightened enforcement of fair lending over the past year, now is the time for community bankers to examine their own fair lending patterns and policies.

By Mary Thorson Wright

Community banks have maintained a strong record of providing access to credit in their local communities and taking their fair lending obligations seriously. However, as early as 2020, sources predicted a substantial rise in enforcement actions in bank-related issues to further the goals of economic inclusion and fair lending. So, now is a good time to track changes in fair lending enforcement efforts and to take stock of programs in support of fair, safe and sound bank practices.

“Banks need to take proactive steps to monitor their own lending patterns, track and analyze the data and, if needed, take corrective action.”
—Michael Marshall, ICBA

“This administration is more proactive in terms of enforcement,” says Michael Marshall, director, regulatory legal affairs for ICBA. “Whether there are fair lending complaints or issues are discovered during examinations or other supervisory activities, we expect diligent follow up. Banks need to take proactive steps to monitor their own lending patterns, track and analyze the data and, if needed, take corrective action before an issue develops with regulators.”

Looking at 2021, it’s easy to spot enforcement trending upward.

A recent history of the CFPB

January 2021: During the previous administration, the number of fair lending cases decreased. Upon his appointment at the start of 2021, Consumer Financial Protection Bureau (CFPB) acting director Dave Uejio confirmed that the CFPB wants to be more actively involved in the fair lending space.

“It’s also time for the CFPB to take bold and swift action on racial equity,” Uejio said in a past comment. “I am going to elevate and expand existing investigations and exams and add new ones to ensure we have a healthy docket intended to address racial equity. This, of course, means that fair lending enforcement is a top priority and will be emphasized accordingly.”

June 2021: The U.S. Department of Housing and Urban Development (HUD) proposed to rescind its 2020 changes to the Fair Housing Act (FHA) disparate impact rule. It would revert to the 2013 standard, which is more plaintiff-friendly, has a lesser pleading requirement and makes it easier for HUD to bring cases under the rule.

August 2021: HUD and the Federal Housing Finance Agency (FHFA) announced an agreement regarding fair housing and fair lending coordination. The two agencies will enhance enforcement of the FHA and oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

October 2021: The CFPB released research showing that consumers in majority Black and Hispanic neighborhoods, younger consumers and those with low credit scores are far more likely to have disputes on their credit reports.

In a press conference about the Trustmark National Bank enforcement action, newly confirmed CFPB director Rohit Chopra said fair lending enforcement will be an emphasis of the Biden administration: “If we allow racist and discriminatory policies to persist, we will not live up to our country’s ideals. We need a fair housing market that is free from old forms of redlining, as well as new digital and algorithmic redlining.”

“HUD’s disparate impact rule change is significant,” says Marshall. “Disparate impact violations don’t require any discriminatory intent. A policy violates the rule if it creates a discriminatory effect on a group of persons unless the policy serves a substantial and legitimate interest that cannot be served by a policy that creates less discriminatory effect.”

He advises community bankers to think about the following questions:

  • Are there areas in my community I am not serving as robustly as others?
  • Are there disparities in terms of interest rates or other terms or loan acceptance rates?
  • If so, does that correlate to identifiable groups?
  • What story does our HMDA data tell?

The future of enforcement

The new rules will be fertile ground for regulators. Examiners will look for potential fair lending issues and investigate them if found. Banks could face stiff penalties for violations, such as in the case of Trustmark. The best way to avoid those consequences is to be proactive, understand your bank’s own lending patterns and seek early course correction, if needed.

Fair lending: Where should you start?

Your program should include but may not be limited to:

  • Board and management oversight
  • Policies and procedures
  • Training
  • Monitoring and/or audit
  • Consumer complaints
  • Third-party oversight
  • Marketing/advertising
  • Application process and underwriting
  • Pricing and other terms and conditions
  • Redlining

Section 1071 of the Dodd-Frank Act (DFA) adds a new element to the fair lending bucket. “It’s a new frontier of fair lending enforcement,” says Michael Emancipator, ICBA vice president and regulatory counsel. “Much like HMDA made available a large dataset for home mortgage lending, 1071 will make a similar dataset available for small business lending.

“When the first data are available, we expect significant attention from the media and public scrutiny about what the data say, approval rates, who is getting loans and on what terms. While finalization is in the future, it is a looming concern.”

Emancipator advises community banks to familiarize themselves with fair lending changes and the potential impact on current lending practices, operations and data collection, maintenance and reporting.

“Not all data will be available in the public domain, so some contextual information might be missing about how or why certain credit decisions were made that could refute potential charges of illegal discrimination,” Emancipator says. “We are trying to highlight things that may cause erroneous conclusions and encourage the CFPB to either remove the data field or find a solution to mitigate the negative consequences from erroneous conclusions. Among other proposed solutions to this problem, the most apparent one we support is to exclude community banks with assets of $1.3 billion or less, or at least not publish the data reported by those banks.”

Completeness, accuracy, conformance to regulatory and legal rules; and consistency among procedures, policies and documentation are all critical. Master the fundamentals to succeed.

Mary Thorson Wright is a writer in Washington, D.C.