CFPB Supervisory Highlight Identifies Discriminatory Bias in Early 2021 Lending
On December 8, 2021, the Consumer Finance Protection Bureau (CFPB) released its Supervisory Highlights report (Report), which, according to CFPB Director Rohit Chopra, “reveals that irresponsible or mismanaged firms harmed Americans during the COVID-19 pandemic.”
The violations identified in the report are as follows:
Charging delinquency-related fees to borrowers in CARES Act forbearances
The Coronavirus Aid, Relief, and Economic Security Act" (CARES Act), signed into law on March 27, 2020, affords certain consumer protections in light of the pandemic, including the ability to temporarily pause or reduce mortgage payments. Additionally, mortgage servicers were not permitted to attach fees to the amendment of the loan terms.
Despite the fee prohibition mortgage servicers charged late and other default-related fees to borrowers as a result of "human and system errors" in direct violation of the CARES Act, and failed to refund the fees until a year later.
Failure to comply with the fee prohibition substantially impacted a large number of consumers. Mortgage servicers were required to remediate impacted borrowers, correct credit reporting to accurately reflect account balances, and correct system errors.
Violations of the Fair Lending Requirements
Under the Equal Credit Opportunity Act (ECOA), covered entities are prohibited from engaging in discriminatory behavior based on "race, color, religion, national origin, sex, marital status, age, receipt of public assistance income, and exercising rights under the Consumer Credit Protection Act.”
The Report identified violations of the ECOA stemming from pricing discrimination. The examination team found many financial institutions had policies and procedures that governed mortgage loan officers' ability to provide consumers with pricing exceptions for a competitive offer. However, the policies and procedures did not outline when the officers were required to provide the exception response to a competitive offer inquiry by the consumers. As a result of this lack of guidance, the examination team “identified lenders with statistically significant disparities for the incidence of pricing exceptions for African American and female applications compared to similarly situated non-Hispanic white and male borrowers.”
Lenders not only failed to not only provide an explanation for the discrepancy, but also failed to document reasoning for their pricing exception decisions—raising fair lending concerns in itself.
In addition to the pricing exception violations, the examination team also found ECOA and Regulation B violations where a questionnaire issued by the lender to a small business loan applicant contained explicit inquiries about the applicant’s religion. Further, the team discovered that where the applicant failed to respond to this inquiry, the extension of credit was denied.
In response to these violations, lenders were required to update their policies and procedures, amend their loan application questionnaires, and issue loans to previously denied applicants.
Erroneous Debiting, Misrepresentations and Failure to Honor Loan Extensions by Payday Lenders
Under the Federal Trade Commission Act (FTCA) deceptive trade practices are prohibited. An act or practice is deceptive where:
1) a representation, omission, or practice misleads or is likely to mislead the consumer;
2) a consumer’s interpretation of the representation, omission, or practice is considered reasonable under the circumstances; and
3) the misleading representation, omission, or practice is material.
The examination team discovered that lenders “debited or attempted to debit from consumer’s accounts the remaining balance of their loans on the original due date after the consumers (1) applied for a loan extension, and (2) received a confirmation email stating that only an extension fee would be charged on the due date,” thereby violating the FTCA. This practice was found to be unfair because it led to unexpected debits of the full loan balance and banking fees, which were not “reasonably avoidable” and the only way to avoid these charges would be cancellation of the loan extension.
In their loan extension email confirmations, lenders misrepresented that consumers “would pay only extension fees on the original due dates of their loans.” Examiners found that these “misrepresentations were likely to mislead a reasonable consumer into believing that the extensions were consummated and only the extension fees would be debited on the due date.”
In response to these FTCA violations, financial institutions are being required to undertake remedial and corrective actions, which are currently under review by the CFPB.
Remittance Transfer Providers Failure to Investigate Notice of Errors
Regulation E, Subpart B (Remittance Rule) “imposes requirements on entities that send international money transfers, or remittance transfers, on behalf of consumers.”
The examination team found that lenders violated the Remittance Rule by depriving consumers of their rights under the Rule where the “providers received notices of errors alleging that remitted funds had not been made available to designated recipients by disclosed dates of availability. Providers then failed to investigate whether deductions imposed by some foreign banks constituted a fee that the institutions were required to refund to the sender as part of the error resolution process.”
In response, offending financial institutions are required to revise their policies and procedures to comply with the fee-refund provisions of the Rule and to remediate consumers who did not receive fee refunds.
Financial institutions should review their policies and procedures to ensure compliance with these acts and that your institution does not engage in these prohibited practices. If you have any questions and concerns about this report or the firm’s recommendations, please contact Kennedy Sutherland.