[co-author: Michael Buckalew]
The Consumer Financial Protection Bureau (CFPB) has been very clear that fair lending and racial equity are top priorities for the agency under Acting Director Dave Uejio. Support of those priorities will be far-reaching.
Here we highlight a few of the CFPB's latest developments in this area, including the launch of its racial and economic equity website, its ongoing study of issues related to alternative data and artificial intelligence, and its recent promotion of Special Purpose Credit Programs. Notably, but not surprisingly, housing is at the forefront of the CFPB's concerns. As the agency works to aggressively implement its priorities related to racial equity, it will be interesting to see how it asserts its jurisdiction and authority across the range of topics it's pursuing.
On June 3, 2021, the CFPB announced the launch of a new website to highlight the agency's efforts to promote racial and economic equity. Concurrent with the launch of the CFPB's new website and an agency blog post, Acting Director Uejio released a video statement reaffirming that racial equity will be a long-term priority for the agency in terms of its enforcement and supervision posture, noting that the CFPB "will take action against institutions and individuals whose policies and practices prevent fair and equal access to credit or take advantage of poor, underserved and disadvantaged communities."
His statement does not specify the legal bases under which he intends to take such actions, however. He also emphasized the CPFB's position that "[c]ommunities of color [have] disproportionately borne the impact both in terms of health and the resulting financial crises" caused by COVID-19.
Housing takes a prominent role on the new site. As one of the key issues brought to the fore by the COVID-19 pandemic, housing instability has been a leading concern for the agency. According to the CFPB, there are more than 2 million households who are at least three months behind on their mortgage payments.
Additionally, the website discusses a May 2021 CFPB report on Characteristics of Mortgage Borrowers During the COVID-19 Pandemic. This report states that "Black and Hispanic homeowners were more than two times as likely as white homeowners to be behind on mortgage payments as of December 2020."
The same report highlighted that Blacks and Hispanics have self-reported at higher rates than other groups that they expect to be evicted from their homes. The unemployment statistics also indicate that the pandemic has exacerbated existing racial disparities in employment. People of Color continue to have higher persistent unemployment rates, according to the data on the site.
The website goes on to detail public information for consumers and recent actions by the agency, such as COVID-19 consumer resources, recent rulemakings, and rules under development by the agency. The CFPB cites its Fair Lending Report to Congress and 2020 Office of Minority and Women Inclusion Annual Report to Congress emphasizing its efforts in this area.
Additionally, the CFPB highlighted its enforcement of the Home Mortgage Disclosure Act to ensure that financial institutions "… are serving the housing needs of their communities" and for the CFPB "to identify possible discriminatory lending patterns." It also outlined the Equal Credit Opportunity Act resources and information collection requirements related to credit for minority-owned, women-owned, and small businesses under Section 1071 of Dodd-Frank.
Finally, the CFPB discussed its actions to encourage financial institutions to improve service for customers with limited English proficiency followed by individual stories of CPFB staff who have experienced and worked to eliminate discriminatory practices in financial services.
Another active area for the CFPB is its ongoing effort to identify potential compliance implications related to using alternative data and artificial intelligence (AI) for making automated underwriting, valuation, and pricing decisions—an area steeped in fair lending and bias concerns. In line with President Biden's recent call to end racial discrimination in the housing market, the CFPB hosted a Home Appraisal Bias Event on June 15, 2021.
This event focused on racial biases that result in inaccurate home valuations and serve as a barrier to home ownership for minority families. It featured an agency panel with Acting Comptroller of the Currency Michael J. Hsu, Chairman of the National Credit Union Administration (NCUA) Todd Harper, Executive Director of the Appraisal Subcommittee of the Federal Financial Institutions Examination Council's (FFIEC) Jim Park, and Senior Advisor for Housing Finance in the Office of the Secretary at the U.S. Department of Housing and Urban Development (HUD) Alanna McCargo.
Among other things, the panelists called for quality control standards for automated valuation models (AVMs) and urged the use of fair lending laws when evaluating the algorithms contained in the models for determining values. They also highlighted an increase in reports of appraisal discrimination and bias issues in the appraisal industry as a whole. To that end, HUD is creating an interagency taskforce to address these issues.
The CFPB and other federal banking agencies recently issued a request for information and comment about the use of AI and machine learning (ML) (as described in a previous blog post). Although AI/ML developments present significant opportunities to improve bank operations and the delivery of financial services, part of the request sought information about fair lending and bias that results from the use of the technologies in financial services.
In late 2020, the CFPB extended its 2017 no-action letter (NAL) to Upstart Network, Inc. for a short period of time so it could continue evaluating Upstart's information to gain insight, particularly with respect to the effect of the company's model for making unsecured loans to consumers during COVID-19. Under the 2017 NAL, the CFPB provided assurance that it had no intent to take supervisory or enforcement action against Upstart under ECOA or Regulation B with respect to the company's automated model for underwriting applicants for unsecured non-revolving credit – see DWT's previous blog post for more information about the 2017 NAL. The CFPB also issued a second NAL to Upstart whereby the agency promised not to make supervisory findings or to bring an enforcement action under ECOA, Regulation B, or the Dodd-Frank Act's prohibition against unfair, deceptive, or abusive acts or practices, unless the NAL is terminated by the CFPB.
The CFPB's NAL policy established a process by which the agency grants limited no action treatment for a new product or service that offers the potential for significant consumer benefit where there is uncertainty about how specific provisions of law would be applied by the CFPB (the CFPB revised its NAL policy in Sept. 2019).
In addition to the measures listed above, the CFPB is promoting the creation and implementation of special-purpose credit programs (SPCP) by for-profit organizations. In December of 2020, the CFPB issued an advisory opinion that addressed regulatory uncertainty related to the development and implementation of SPCPs by for-profit organizations.
For context, SPCPs are a way that companies can create credit programs to address certain social needs, and can request and use certain protected class information in connection with the program—something that would generally be prohibited without a SPCP in place. But ECOA and Regulation B provide scant guidance on what's expected of companies, particularly for-profit organizations, when setting up and implementing a SPCP.
Industry commenters responding to the CFPB's July 2020 request for comment on ECOA and Regulation B seized the opportunity to highlight the need for more guidance around SPCPs, which creates regulatory uncertainty and ECOA risk if a SPCP were deemed non-compliant by the CFPB. The CFPB's advisory opinion aimed to clarify (1) the type of content that a for-profit organization should include in its written plan to establish and administer a SPCP, and (2) the type of research and data that may be appropriate to inform a for-profit organization's determination that a SPCP is needed to benefit certain classes of people.
Subsequently, the CFPB's Fair Lending Director Patrice Ficklin and Senior Fair Lending Counsel Charles Nier authored a piece in the Poverty & Race Research Action Council's publication "Racial Justice in Housing Finance: A Series on New Directions" discussing SPCPs, the advisory opinion, and the importance of promoting SPCPs as "a central priority for the CFPB's efforts to 'take bold and swift action on racial equity.'"
These developments are consistent with the priorities previously expressed by Acting Director Uejio. Racial equity has been among his key concerns and he has promised to take action against anyone with policies and practices that prevent fair and equal access to credit.
The developments also come on the heels of other fair lending and racial equity issues concerning the CFPB. For instance, a GAO report criticized the CFPB's January 2018 reorganization and reallocation of certain of the responsibilities of its Office of Fair Lending and Equal Opportunity. Notably, this change occurred under a different CFPB regime. As a result of the GAO report, the CFPB committed to implement performance goals and measures specific to its fair lending supervision and enforcement.
Given its priorities, we expect to see an increase in CFPB examination findings and enforcement actions related to fair lending and racial equity—a trend that has already begun according to Uejio's recent statements at the Asian Real Estate Association of America Housing and Diversity Conference. As such, entities subject to the CFPB's jurisdiction should ready themselves to demonstrate their compliance with fair lending and related practices.
Additionally, housing and mortgage servicing are a top priority for the CFPB, especially in the wake of COVID-19. The CFPB has made numerous statements targeting mortgage servicers and issued a compliance bulletin earlier this year vowing to closely monitor servicers' ECOA compliance, especially with respect to limited English proficiency borrowers and income evaluations for borrowers that derive income from sources such as public assistance, alimony, and child support. Mortgage servicers and debt collectors who handle distressed borrowers, or borrowers in need of assistance, should expect to be closely scrutinized.