Banks, client teams on CFPB: Don't rush to revise the redlining regulation

Banks join consumer groups to urge the Consumer Financial Protection Bureau not to accelerate possible changes to the Equal Credit Opportunity Act.

The CFPB last month urged the public to consider possible ways to improve the Agency's implementation of the 1974 Act, which bans Discrimination in all aspects of a lending business through Regulation B.

A coalition of banking trade groups, consumer advocates and civil rights groups sent a letter to CFPB director Kathy Kraninger on Monday asking for more time to respond. The office gave commentators October 2, two months after the agency's announcement was published in the federal register.

"We respectfully assume that a 60-day comment period does not provide enough time to meaningfully address the ten important topics listed in the 'Request for Input', wrote the groups to which the American Bankers Association, the Bank Policy Institute and the Consumer Bankers Association include, among others, the Independent Community Bankers of America.

"Comments on each of these topics are critical to achieving a fairer and more inclusive marketplace. Additionally, the COVID-19 emergencies and shutdowns are making the 60-day comment deadline even more difficult for all of us. For these reasons, it's important to be thoughtful comments on each topic to help the Bureau achieve these goals will take more time than previously planned. "

Stakeholders have been particularly in turmoil over the length of the public comment period at a time when the nation is focused on the pandemic and a national debate over racial injustice.

"This civil rights bill is too important to address … at a time of great distress when COVID-19 and the country are debating systemic racism," said Odette Williamson, a lawyer with the National Consumer Law Center who signed the letter. "We are very concerned about the size of the [information request] and that there is not enough time for a principled and meaningful answer."

The office issued the RFI on the revision of the ECOA on July 28, the day before Kraninger testified in front of the Congress. The request also came three months before the presidential election, which could result in Kraninger leaving the office if alleged Democratic candidate Joe Biden wins in November.

ECOA experts say that each of the topics in the CFPB's RFI is worth investigating in its own right. At the top of the list is whether compliance with ECOA rules should be revised based on two separate Supreme Court rulings, one on discrimination based on gender identity and the other on "different impacts" where borrowers can claim discrimination themselves when a lender has not shown discriminatory intent.

While the coalition letter expressed support for efforts to amend or clarify Reg B, it noted that there is "no legal deadline or other mandate" requiring a 60-day comment period.

"The Bureau has not indicated that it has certain regulatory changes or clarifications in mind that would warrant the shorter timeframe envisaged in the current 60-day comment period," the groups said. "We believe that any consideration of how Rule B could be amended or refined to ensure greater equity and fairness should be done through a process that offers a greater chance for thoughtful public participation."

Although the agency's notice suggests the bureau could ease regulatory burdens on lenders, bankers are also concerned about how the CFPB will evolve the regulation of small business lending into a separate regime that will address post-home mortgage lender requirements Mortgage Disclosure Act is similar, some observers said.

Small business loans appear several times in the agency's request for comment. For example, one question looks at how lenders are using artificial intelligence and machine learning in underwriting. The office also asked for ideas on how the implementation of the ECOA "could support efforts to meet the credit needs of small businesses, particularly minority and women-owned businesses".

Some observers said the bureau might try to act quickly as the upcoming presidential election puts the agency's leadership on shaky ground.

"There is not enough time to comment," said Rick Fischer, senior partner at Morrison & Foerster, which represents banks and other financial institutions. "What is happening is that the CFPB is now realizing that their time is limited and they are trying to move things forward."

Fischer also noted that the ECOA is technically related to a regulation that the agency has yet to enact under the Dodd-Frank Act, which requires institutions to provide data on their small business loans.

"There are many things related to ECOA, especially data collection for small businesses, that are so complicated," he said. "They ask for comments on a lot of topics and it will be very difficult for the CFPB to cover them all."

The CFPB's inquiry also asked for an opinion on existing rules in order to encourage lenders to use "positive advertising" to target disadvantaged groups. the extent to which federal ECOA regulations override state laws; how to incentivize lenders to contact consumers with limited English language skills; and whether the agency should provide more clarity on "when all or part of the applicant's income comes from a public aid program".

The CFPB's RFI comes at a time when fair housing lawyers and lenders are already struggling to comment on the CFPB's "qualifying mortgage" proposal and the Federal Housing Finance Agency's proposed capital rule for Fannie Mae and Freddie Mac, said Lisa Rice, President and CEO of the National Fair Housing Alliance. The NFHA also signed the letter.

"This is a death by a thousand comments," said Rice. "If they want consumers to weigh up, they have to realize that we are all small groups, and even lenders don't have big public policy deals, so they have to be a little more flexible."

"Now is not the time to face a triple pandemic with a health crisis, economic disparities and … [the focus on] systemic racism," Rice said.

During her last hearing on Capitol Hill, Kraninger was harshly criticized by the Democratic legislature for failing to do more to prevent redlining and credit discrimination. Under the Drumpf administration, the CFPB has only issued two fair credit enforcement measures in three years.

Some experts suggest that the CFPB could provide guidance on how to implement the ECOA in relation to any of the issues covered in the RFI and the Agency will focus on one focus based on the comments received. Still, such a forecast could be reversed if Biden wins in November. According to a recent Supreme Court decision, a president can dismiss a seated CFPB director for no reason.

"The answers and guidance we ultimately get will largely depend on which administration is in power in January," said Richard Gottlieb, partner at Manatt.

Still, Gottlieb said the RFI is discussing issues that are common and that additional guidance could help financial institutions get a handle on compliance. For example, a clearer policy is needed for catering to borrowers with limited English proficiency, as most lenders typically only provide a limited set of loan documents in English and possibly Spanish.

"We have long advised our customers to be careful when lending to people with limited English skills," said Gottlieb. "Creating some safe havens would be a step in the right direction."

However, given the criticism from Democratic lawmakers of Kranninger's record on fair lending issues, there are likely to be more setbacks as the CFPB considers changes to the ECOA.

"Your job, Director Kraninger, is to look out for everyone else, for workers and families without lobbyists, who have no wealth and no connections," said Sen. Sherrod Brown, D-Ohio, the US Senate Banking Committee's top Democrat at a hearing on July 29th. "That's why we started this agency a decade ago," said Brown.

Some experts said the CFPB had planned to hold a symposium to implement ECOA but could not do so due to the coronavirus pandemic. Therefore, the office made the request for information instead.

"The information transmitted will help us to enforce the Equal Credit Opportunity Act [ECOA]," said Kraninger in the same hearing to the legislature. "The CFPB is taking steps to make real and lasting change in our financial system so that African Americans and other minorities have an equal opportunity to build wealth and bridge the economic divide. One of the topics the public can comment on is how consumers those with limited English skills and applicants who earn income from many public aid programs can be better protected. "

Meanwhile, consumer and industry advocates see a potentially large problem in the CFPB, suggesting possible changes to the "Adverse Action" notification requirements. ECOA urges the lenders to inform the borrower of the reason why the creditor took negative action in relation to an application.

Observers said the agency needs to carefully address such requirements as financial institutions increasingly use AI in determining credit decisions.

"How will you disclose an adverse act and why has someone been denied credit if the company does not understand how the algorithm made the decision and how it is used in the credit context?" Williamson said.

Fischer agreed, noting that bankers are concerned about increased litigation.

"Undesirable actions related to rating systems are a huge problem," he said. "When it comes to AI machine learning, you can't just say it's a black box, you have to say what are the main reasons for being a borrower." Credit denied.

Fischer suggested that the agency may need to narrow the focus of ECOA changes after receiving comments.

"What they could do is give a guide rather than a full set of rules, but at the moment they have thrown out a really wide net and have to pull the net in before they see what they have for dinner," said Fischer. "As soon as you see what you have collected, you can decide."

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