[co-author: Michael Buckalew]
The Consumer Financial Protection Bureau (CFPB) has been very clear that fair loans and racial equity are top priorities for the agency under the leadership of Acting Director Dave Uejio. Support for these priorities will be far-reaching.
Here we highlight some of the CFPB’s latest developments in this area, including the launch of its website on racial and economic equity, 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 CFPB’s concerns. As the agency strives to aggressively implement its racial equity priorities, it will be interesting to see how it asserts its competence and authority in all of the matters it pursues.
Racial and Economic Equity website launched
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. Along with the launch of the new CFPB 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 enforcement and oversight posture, noting that the CFPB “will take action against institutions and individuals whose policies and practices prevent fair and equal access to credit or benefit poor, underserved and disadvantaged communities.”
However, his statement does not specify the legal bases on which he intends to take such measures. He also underlined the position of the CPFB that â[c]communities of color [have] have disproportionately borne the impact both in terms of health and the resulting financial crises “caused by COVID-19.
Housing occupies a predominant place on the new site. As one of the key issues highlighted by the COVID-19 pandemic, housing instability has been a major 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 CFPB report from May 2021 on the characteristics of mortgage borrowers during the COVID-19 pandemic. This report states that “Black and Hispanic homeowners were more than twice as likely as white homeowners to be behind on mortgage payments in December 2020.”
The same report pointed out that blacks and Hispanics reported at higher rates than other groups that they expect to be evicted from their homes. 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 data from the site.
The website then details public consumer information and recent agency actions, such as COVID-19 consumer resources, recent regulations, and rules being developed by the agency. The CFPB cites its report on Equitable Loans to Congress and its 2020 Annual Report from the Office of Minority and Women Inclusion to Congress, highlighting its efforts in this area.
In addition, the CFPB highlighted its application of the Home Mortgage Disclosure Act to ensure that financial institutions ââ¦ meet the housing needs of their communitiesâ and for the CFPB to âidentify possible discriminatory loan modelsâ. He also described the Equal Credit Opportunity Act resources and credit information collection requirements for minority-owned businesses, women, and small businesses under Dodd-Frank Section 1071. .
Finally, the CFPB discussed its actions to encourage financial institutions to improve service for clients with limited English proficiency, followed by individual stories from CPFB staff who have lived and worked to eliminate discriminatory practices in financial services.
Ongoing study on issues with alternative data and AI
Another active area for the CFPB is its continued effort to identify potential compliance implications related to the use of alternative data and artificial intelligence (AI) to make automated underwriting, valuation and pricing decisions – an area steeped in fair loan issues and bias. In line with President Biden’s recent call to end racial discrimination in the housing market, the CFPB hosted an event on home valuation bias on June 15, 2021.
This event focused on the racial prejudices that lead to inaccurate home valuations and a barrier to homeownership for minority families. He presented a panel of agencies with Acting Comptroller of the Currency Michael J. Hsu, President of the National Credit Union Administration (NCUA) Todd Harper, Executive Director of the Federal Financial Institutions Examination Assessment Subcommittee Council (FFIEC) Jim Park, and Senior Housing Finance Advisor in the Office of Secretary of the US Department of Housing and Urban Development (HUD) Alanna McCargo.
Among other things, panelists called for quality control standards for automated valuation models (AVMs) and urged the use of fair loan laws when evaluating algorithms contained in the models. to determine the values. They also highlighted an increase in reports of issues of discrimination and bias in evaluation across the evaluation industry. To this end, HUD creates an interagency working group to address these issues.
The CFPB and other federal banking agencies recently posted a request for information and commentary on the use of AI and machine learning (ML) (as described in a previous blog post). While developments in AI / ML present significant opportunities for improving banking operations and the provision of financial services, part of the demand was for information on fair lending and the biases resulting from the use of technologies. in financial services.
At the end of 2020, the CFPB extended its 2017 No Action Letter (NAL) to Upstart Network, Inc. for a short period so that it could continue to evaluate Upstart information for better understanding, particularly with regard to the effect of the company’s model for making unsecured loans to consumers during COVID-19. As part of the NAL 2017, the CFPB assured that it does not intend to take any supervisory or enforcement action against Upstart under the ECOA or Regulation B with respect to the model automated underwriting for applicants for unsecured non-revolving credit – see previous DWT blog post for more on NAL 2017. CFPB also issued a second NAL to Upstart whereby the agency has promised not to make any monitoring findings or take enforcement action under the ECOA, Regulation B or the Dodd-Frank Act prohibition against unfair, deceptive or abusive acts or practices, to unless the NAL is terminated by the CFPB.
CFPB’s NAL policy has established a process by which the agency grants limited treatment of no action for a new product or service that offers the potential for significant benefit to the consumer when there is uncertainty as to how whose specific provisions of the law would be applied by the CFPB (the CFPB revised its NAL policy in September 2019).
Promotion of special purpose credit programs
In addition to the measures listed above, the CFPB promotes the creation and implementation of specific credit programs (SPCP) by for-profit organizations. In December 2020, the CFPB issued an advisory opinion that addressed regulatory uncertainty related to the development and implementation of SPCP by for-profit organizations.
For context, SPCPs are a way for businesses to create credit programs to meet certain social needs, and can request and use certain protected class information in relation to the program, which would generally be prohibited without an SPCP in place. square. But ECOA and Regulation B provide little guidance on what is expected of businesses, especially for-profit organizations, when setting up and implementing an SPCP.
Industry commentators who responded to CFPB’s July 2020 request for comment on ECOA and Regulation B took the opportunity to highlight the need for more guidance on SPCPs, which creates uncertainty regulatory and ECOA risk if an SPCP is deemed non-compliant by the CFPB. The CFPB advisory opinion was intended to clarify (1) the type of content that a for-profit organization should include in its written plan for establishing and administering an SPCP, and (2) the type of research and data that may be relevant to inform a for-profit organization’s determination that an SPCP is needed to benefit certain categories of people.
Subsequently, CFPB’s Director of Fair Lending, Patrice Ficklin, and Senior Equitable Lending Advocate, Charles Nier, wrote an article in the Poverty & Race Research Action Council publication “Racial Justice in Housing Finance: A Series on New Directions âdiscussing the SPCP, the advisory opinion and the importance of promoting the SPCP as aâ central priority for the CFPB’s efforts to âtake bold and swift action on racial equityâ . “
These developments are consistent with the priorities previously expressed by Acting Director Uejio. Racial equity has been one of his main concerns and he has pledged to take action against anyone with policies and practices that prevent fair and equal access to credit.
The developments also come in the wake of other fair lending and racial equity issues regarding the CFPB. For example, a GAO report criticized the reorganization of the CFPB in January 2018 and the reassignment of some of the responsibilities of its Office of Fair Lending and Equal Opportunity. Notably, this change occurred under a different CFPB regime. Following the GAO report, the CFPB committed to implementing performance targets and specific measures for its equitable supervision and application of loans.
Given its priorities, we expect an increase in the results of CFPB reviews and enforcement actions related to equitable lending and racial equity – a trend that has already started according to Uejio’s recent statements during the Asian Real Estate Association of America Housing and Diversity Conference. As such, entities subject to CFPB jurisdiction should prepare to demonstrate compliance with fair and related lending practices.
Additionally, housing and mortgage services are a top priority for CFPB, especially in the aftermath of COVID-19. The CFPB has made numerous statements targeting mortgage service providers and issued a compliance bulletin earlier this year, promising to closely monitor service providers’ compliance with the ECOA, especially with respect to borrowers who are in control. English and income assessments for borrowers who derive income from sources such as public assistance,, and child support. Mortgage agents and collectors dealing with distressed borrowers or borrowers in need of assistance should expect to be closely monitored.