Mortgage

Buckle up: CFPB brings again regulation by way of enforcement

The Consumer Financial Protection Bureau is making a comeback. The CFPB, which oversees financial institutions with a strong focus on consumer protection and ensuring the fairness and equity of financial markets, has been a waning force during the Trump administration. Large financial institutions enjoyed both fewer enforcement actions and lower civil fines.

Now, well into the second hundred days of the Biden government, the tide is turning, driven in part by increasing recognition of the diverse financial impacts of the pandemic and national awareness heightened by the racial justice movement. This fundamental shift will have a significant impact on any bank that wants to take a holistic approach to customer, community and regulatory relationships, and especially larger banks that are more likely to be subject to scrutiny.

Most importantly, all major banks should prepare for the return of the “supervision through enforcement” that prevailed in the years following the financial crisis from which the CFPB emerged. President Biden's candidate to lead the CFPB, a member of the Federal Trade Commission, Rohit Chopra, was the first student loan office ombudsman under former CFPB director Richard Cordray and is expected to move the office to its former place at the forefront of consumer protection in financial services return.

Under Chopra, complex financial institutions with large consumer portfolios that had significant leniency activities during COVID-19 and under the CARES Act are likely to be prime targets. Chopra's Senate confirmation has recently been delayed (again) but is expected to be confirmed before the Senate's August recess. Meanwhile, acting CFPB Director David Uejio is taking steps of his own to step up enforcement efforts.

Among other things, the CFPB has signaled that it will seek to apply fair lending / banking principles, such as the differential impact theory of liability, to non-traditional (non-origin) activities. These include in particular the credit service activities of institutions with large mortgage, auto and consumer portfolios. The theory of the differential impact of liability enables the government to justify discrimination based on the outcome of a banking policy that appears neutral at first glance.

The agency is already expanding its bank of lawyers, and anecdotal reports suggest it has started citing more "matters that require attention", with higher civil fines than the last administration. Under the leadership of Uejio, the office has already launched several interesting enforcement actions, with a focus on debt collections and other activities that appear to be exacerbated by COVID-19 and its economic consequences.

As in the past, the office will use media attention to maximize pressure on large financial institutions that violate consumer protection laws and regulations, and is likely to work with the Department of Justice, Department of Housing and City Council to step up enforcement action other federal agencies.

In his testimony to the Senate Banking Committee and other forums, Commissioner Chopra said he would specifically focus on the following areas of banking:

The emerging regulatory environment will provide an opportunity to double the commitments to improve diversity and inclusion and to tackle systemic racism and inequality. It will also be a challenge to demonstrate this commitment to regulators through concrete results.

Any bank involved in the activities listed above should now consider a comprehensive approach to CFPB readiness to identify potential risks of non-compliance with consumer protection laws and regulations and take appropriate corrective action. This should include ongoing analysis of real-time consumer complaint data to identify potential consumer protection deficiencies, and modernizing bankers' approach to risk management, possibly in operational areas that have never been subject to intense regulatory scrutiny.

Auto loans, including direct and indirect financing of new and used car purchases; the use of big data and alternative data sources in underwriting; Failures and withdrawals; and possibly the revision of existing CFPB guidance on compliance with the Equal Credit Opportunity Act for indirect car loans. Fair lending / banking / fair treatment, including applying the ECOA and its Implementing Regulation B to discretionary underwriting, pricing and governance; Application of different standards of effectiveness to mortgage loan and service, particularly in connection with loss mitigation and deferral activities of the CARES Act; Use of artificial intelligence, alternative data, and machine learning in credit decisions and other financial models; statistical analysis of service decisions; Analysis of online / digital marketing strategies; and the potential application of fair credit principles to fraud and dispute resolution. Unfair and misleading acts and practices, including the CFPB's revised guidelines on its “Abusive” standard. Fair Credit Reporting Law, including priority ratings of credit bureaus and providers, inaccurate reporting of placement and failure to conduct a "proper investigation" into disputes during enforcement of the COVID-19th Military Lending Act and Servicemembers Civil Relief Act, and increased attention to protecting veterans' rights in general. Mortgage loans, including lending, servicing and default management; Loss mitigation, forbearance, amendment, expansion, refinancing and foreclosure activities; Protection of borrowers with limited English proficiency. Ancillary / ancillary products (guaranteed asset protection, extended guarantee programs, and various forms of credit insurance), including assessing product utility and reconciling product value and cost to consumers and potential enforcement activities similar to what followed the 2009 CARD Act . Consumer complaints, including disputes relating to credit services, collections and credit reports; abnormal incidents resulting in consumer harm; emerging trends suggesting systemic problems; and developing a comprehensive, documented process for investigating, identifying, documenting and resolving the root causes of consumer complaints.

The emerging regulatory environment will provide an opportunity to double the commitments to improve diversity and inclusion and to tackle systemic racism and inequality. It will also be a challenge to demonstrate this commitment to regulators through concrete results.

Any bank involved in the activities listed above should now consider a comprehensive approach to CFPB readiness to identify potential risks of non-compliance with consumer protection laws and regulations and take appropriate corrective action. This should include ongoing analysis of real-time consumer complaint data to identify potential consumer protection deficiencies, and modernizing bankers' approach to risk management, possibly in operational areas that have never been subject to intense regulatory scrutiny.

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