The CFPB has issued “ECOA Baseline Review Procedures” to be used by its examiners. (The CFPB has labeled the procedures “guidance” and did not add them to its Supervision and Examination Manual.) The procedures consist of six “baseline review modules” for examiners to use “during ECOA baseline reviews to identify and analyze risks of ECOA violations, to facilitate the identification of certain types of ECOA and Regulation B violations, and to inform fair lending prioritization decisions for future CFPB reviews.” The procedures indicate that ECOA baseline reviews are one of three types of fair lending reviews conducted by the CFPB. The other reviews are ECOA targeted reviews (conducted using the ECOA examination procedures in the Manual) that focus on specific areas of fair lending risk and HMDA reviews.
The modules consist of the following:
Module I addresses a company’s fair lending supervisory history and asks the examiner to note information such as any fair lending violations and areas of fair lending risk previously identified in private litigation or by the CFPB or other federal or state regulators in exams or reviews, and any federal or state investigations or enforcement actions or discrimination complaints received by the company or the CFPB from consumers or advocacy groups that reflect a heightened fair lending risk.
Module II addresses a company’s fair lending compliance management system and reflects the CFPB’s expectation for companies to conduct a fair lending risk analysis in connection with any major changes in business (new products) or structure (acquisitions).
Module III addresses risks related to mortgage lending policies and procedures. The information sought includes information that reflects the CFPB’s concern about the extent to which a company’s operations vary in a way that might indicate a heightened fair lending risk (such as operating full service branches only in predominantly non-minority neighborhoods, advertising practices that might suggest that certain potential customers are less desirable, and use of mailing or other distribution lists that exclude or disfavor certain geographic areas).
Module IV addresses risks related to mortgage servicing. The information sought includes information that reflects the CFPB’s concern about policies and procedures for servicing loans to limited English proficiency (“LEP”) borrowers (such as whether files of LEP borrowers who may require assistance are flagged, customer service options are available for customers who speak languages other than English, customer service personnel who speak languages other than English receive appropriate training, and translations of English language documents are available.)
Module V addresses risks related to auto lending. In addition to information related to buy rates in contract purchases from dealers (which the CFPB refers to as “indirect auto lending”), information is sought related to par rates for direct lending. In each scenario, examiners are asked to look at the circumstances under which deviations from the rate are permitted, caps or other limits on discretion to go above or below buy or par rates, and controls on the exercise of any discretion afforded.
Module VI addresses risks related to other products. Information is sought about policies and procedures for pricing, underwriting, referrals, compensation, marketing and other lending operations as they relate to fair lending risk. No specific product lines (short term loans, credit cards, private education loans) are singled out for special emphasis.
Modules III, V and VI, which address products, contain some common themes. All seek information on whether underwriting policies vary on a prohibited basis (such as by setting stricter income requirements for elderly or younger applicants or unmarried versus married applicants) or contain factors that could have a disproportionately negative, unjustified impact on a prohibited basis (such as requiring a minimum loan amount or restricting types of property as collateral).
They all also seek information about pricing policies that could have a similar impact on a prohibited basis (such as pricing policies that vary by zip code), the availability of “tier bump” options (policies that permit upgrading a borrower from a higher cost category to a lower cost category–something we think the CFPB would like to see, assuming that it is done without discriminating), and the use of prohibited or problematic criteria in automated scoring systems (such as a prohibited use of age (disfavoring elderly applicants), a close proxy for a prohibited basis (such as whether the applicant is retired), and the use of criteria that may have a disparate impact (such as zip code)).
As might be expected, the baseline review procedures reflect the CFPB’s intention to use the disparate impact theory to establish a violation of the ECOA and Reg B. They demand careful review by all creditors subject to CFPB supervision.