Mortgage

The place CFPB will deal with the honest lending investigation below the brand new boss

While Rohit Chopra will take the helm of the Consumer Financial Protection Bureau, many expect fair lending to be high on his agenda. But its anti-discrimination efforts may differ from those of its predecessors.

The anti-redlining policy has traditionally focused on mortgage loans. Analysts say housing construction will continue to be a priority, but the CFPB is also likely to crack down on fair lending violations for small business loans that are subject to the paycheck protection program.

Meanwhile, fair lending investigations and penalties against allegedly biased underwriting algorithms could be a starting point for the office to address potentially discriminatory artificial intelligence practices.

"I think the first thing they'll haunt is fair lending violations – big time," said Scott Pearson, partner at Manatt, Phelps & Phillips, LLP.

"They will appeal to absolutely anyone who uses artificial intelligence, machine learning, and automated underwriting with algorithms," said Pearson. "You will have a whole new set of fair lending theories."

The CFPB has signaled throughout the year that it plans to make racial justice and fair lending a priority in investigations and audits. But exactly how Chopra, confirmed in a party vote by the Senate last week, could tackle discriminatory lending has been the subject of some debate.

How exactly Rohit Chopra, who was ratified by the Senate in a party vote last week, could tackle discriminatory lending is the subject of some debate.

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The bureau has already warned mortgage servicers, credit bureaus and lenders who have approved PPP loans that it is analyzing huge amounts of data to determine whether accidental discrimination has harmed certain protected borrowers.

"Given the wide range of fair lending concerns, it will emerge in a variety of contexts including evictions, foreclosures and mortgage services in general, as well as credit reports related to legal compliance issues due to the pandemic," said Quyen Truong, a partner at Stroock & Stroock & Lavan LLP and former Assistant Director and Deputy General Counsel at CFPB. "Much of the regulatory activities related to the pandemic will focus on the oversized impact on vulnerable populations, including racial minorities and low-income consumers."

Acting CFPB Director Dave Uejio has hastened the investigation for Chopra to ensure the CFPB has a healthy list of cases related to racial justice. (Uejio will remain in charge of the office until Chopra leaves his current position on the Federal Trade Commission, which is expected to be late next week.)

Addressing the racial wealth gap and addressing issues of racial justice is an important political goal of the Biden government. Uejio also said the financial services industry "created and exacerbated racial inequality".

By far the biggest concern of banks is whether PPP loans will end up in the CFPB's crosshairs. The CFPB has announced that it will investigate whether, following the adoption of the coronavirus bailout last year, lenders prioritized PPP requests from existing customers to such an extent that minority-owned companies were at a disadvantage in granting loans through the Small Business Administration program Looking for.

"What the banking agencies, and the CFPB in particular, will be dealing with is: Was there discrimination in the way this money was spent and who was given access to it?" Said Rachel Rodman, Associate at Cadwalader and former CFPB Senior Counsel in the Legal Department . "This not only addresses issues related to COVID, which are priority number one, (but) it also applies to issues of racial justice."

The CFPB is expected to conduct a statistical analysis of PPP loans that will filter the data to determine whether race or gender or other traits played a role that made it easier for companies to obtain a PPP loan.

Many legal experts believe that the CFPB will use the “multiple impact” standard to punish lenders for unintended discriminatory effects.

“It's not about discriminatory intent, but about the impact of banking policies and when those policies – even if at first glance neutral – lead to an otherwise inexplicable difference between the applicants who received the loans – and for example they are all white men – and applicants who didn't, "Rodman said.

Bank trading groups have commended banks for working around the clock to provide government-backed loans through the PPP. If PPP lenders end up in the CFPB's crosshairs for fair lending violations, the industry is likely to push back. It could take a year or more to build a strong case against a financial firm based on its credit data, experts said.

Chopra is also expected to enact a rule requiring small business lenders to report data on the race, gender, and ethnicity of primary small business owners and which applicants are denied credit.

The CFPB has also made civil investigative requests on companies that use alternative data and artificial intelligence in lending decisions that may violate fair lending laws.

The CFPB has the power to take enforcement action against violations of the Equal Credit Opportunity Act. The ECOA prohibits credit discrimination based on race, color, religion, national origin, gender, marital status, age or because a person receives public support. In anticipation of a crackdown, some fintech firms have asked the CFPB to provide specific guidance on the use of technology in credit decisions, even if the agency is considering making changes to the ECOA.

Few deny that Chopra will have a keen interest in the use of AI and machine learning by fintechs. He was a commissioner at the FTC for three years, writing extensively on technology companies. He is expected to instruct the CFPB staff to analyze black box algorithms that many lenders say promote inclusivity, but some consumer advocates argue that they contain racial bias.

"Chopra is simply uniquely positioned to be the dominant regulator in the fintech space because of the CFPB's authority over non-banks," said Rodman.

To be clear, no one expects a focus on small business lending and alternative underwriting data to cause the agency to turn a blind eye to fair lending violations in the housing sector.

The CFPB's auditors closely examine whether mortgage lenders have committed marketing discrimination that would discourage certain borrowers from applying for a home loan.

The office gave some insight into its views on racial justice issues in a 55-page report last month that analyzed consumer complaints based on race and income.

"Certain parts of the report show that the CFPB views (complaint) data primarily as evidence of unfair access to the mortgage markets to gain access to this low interest rate environment," said Richard Horn, co-managing director of the law firm Garris Horn and a former senior counsel and special advisor to the CFPB.

When analyzing complaints related to consumer credit, the CFPB found that demographics tended to match the types of complaints a consumer submitted to the CFPB. For example, white borrowers complained more about the lending process, suggesting they had better access to credit, while black consumers complained more about the credit report.

"These differences serve as another reminder of the racial wealth gap in the United States and its relationship to access to credit, particularly housing finance," the CFPB said in the report.

The office is expected to act swiftly on issues related to redlining and other discriminatory practices due to the lack of enforcement action during the Trump administration.

"CFPB staff have worked hard on many fronts from rulemaking to oversight and enforcement, but they are waiting for the new director to come in and give the green light," said Truong.

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