Enforcement Trends. Paul F. Hancock K&L Gates LLP 200 S. Biscayne Blvd., Suite 3900 Miami, Florida

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1 Enforcement Trends Paul F. Hancock K&L Gates LLP 200 S. Biscayne Blvd., Suite 3900 Miami, Florida Copyright 2016 by K&L Gates LLP. All rights reserved.

2 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) Procedural History In January 2014, the CFPB filed an administrative charge against mortgage lender PHH alleging violations of RESPA Section 8(a) arising from payments PHH received on mortgage reinsurance premiums from 1995 until May The administrative law judge s recommended decision imposed liability and ordered disgorgement of payments for loans that closed from July 2008 forward, but payments prior in time would be time-barred. PHH and the CFPB appealed the recommended decision the first appeal of a CFPB administrative enforcement decision. Director Cordray issued a final order requiring PHH to discorge $109 million i.e., all payments received after July 2008, including for loans that closed back to PHH appealed in federal court. klgates.com 2

3 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) This is a case about executive power and individual liberty. Holdings: The CFPB is unconstitutionally structured as an independent agency with executive power concentrated in a single, unchecked director who may be terminated by the President only for-cause. To remedy the constitutional flaw, the court severs the forcause provision such that the President now will have the power to remove the Director at will, and to supervise and direct the Director. klgates.com 3

4 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) Holdings: If PHH had fully prevailed on its constitutional argument regarding severability, the CFPB could not continue operation absent Congressional action. However, due to severability, the CFPB [] will continue to operate and to perform its many duties, but as an executive agency akin to other agencies headed by a single person e.g, DOJ. klgates.com 4

5 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) Holdings: Because the CFPB will continue to exist, the Court addresses the substance of Director Cordray s final order. The court agree[s] with PHH that Section 8 of [RESPA] allows captive reinsurance arrangements so long as the amount paid by the mortgage insurer for the reinsurance does not exceed the reasonable market value of reinsurance. The court agrees with PHH that the CFPB s departure from HUD s consistent prior interpretations and the CFPB s retroactive application of its new interpretation violated bedrock principles of due process. klgates.com 5

6 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) Holdings: The Court disagrees with the CFPB that under Dodd-Frank there is no statute of limitations for any CFPB administrative actions to enforce consumer protection laws. The Court disagrees with the CFPB that there is no statute of limitations for administrative actions to enforce Section 8 of RESPA a three-year statute of limitations applies to all CFPB enforcement actions to enforce Section 8, whether brought in court or administratively. klgates.com 6

7 PHH Corp. v. CFPB, No (D.C. Cir. Oct. 11, 2016) Implications and Open Questions Comptroller of the Currency Some have suggested that the CFPB Director is similar to the Comptroller of the Currency. But unlike the Director, the Comptroller is not independent. The Comptroller is removable at will by the President. Federal Housing Finance Agency The FHFA is a contemporary of the CFPB and merely raises the same question we confront here. A body created only in 2008 obviously does not constitute a historical precedent for the CFPB. Statute of limitations triggers: origination vs. each payment Possibility of continued review En banc review? U.S. Supreme Court review? klgates.com 7

8 UDAAP OVERVIEW UDAAP = unfair, deceptive, or abusive acts or practices UDAAPs prohibited by Dodd-Frank Wall Street Reform and Consumer Protection Act 1031 and 1036 covered persons and service providers prohibited from committing or engaging in UDAAPs in connection with any transaction with a consumer for a consumer financial product or service, or in the offering of a consumer financial product or service Principles of unfair and deceptive practices informed by Federal Trade Commission Act, but abusive practices is a unique term klgates.com 8

9 UDAAP OVERVIEW: UNFAIR DEFINITION An act or practice is generally unfair when: It causes or is likely to cause substantial injury to consumers; The injury is not reasonably avoidable by consumers; and The injury is not outweighed by countervailing benefits to consumers or to competition. klgates.com 9

10 UDAAP OVERVIEW: UNFAIR EXAMPLES Unfair collection practices: Excessive calls to consumers Disclosing debts to third parties Calling consumers at work after being asked not to Failing to post payments timely Unfair billing practices: Enrolling consumers in products without their consent Charging consumers fees that resulted in consumers exceeding credit limits, thus leading to additional fees and interest charges Failing to prevent/identify/correct billing for services not provided Applying payments to maximize late fees and interest klgates.com 10

11 UDAAP OVERVIEW: DECEPTIVE DEFINITION An act or practice is generally deceptive when: It misleads or is likely to mislead the consumer; It is material; and The consumer s interpretation is reasonable under the circumstances. klgates.com 11

12 UDAAP OVERVIEW: DECEPTIVE EXAMPLES Deceptive advertising: Misrepresenting that a communication is from an attorney or from or affiliated with a government source. Issue: Can disclaimers preclude a claim of deception? Prominent: Is the statement big enough for the consumer to notice? Misleading impressions cannot be cured by fine print. Presentation: Are the wording and format easy for a consumer to understand? Placement: Is the information in a location where consumers can be expected to look? Proximity: Is the information near the claim it qualifies? klgates.com 12

13 UDAAP OVERVIEW: DECEPTIVE EXAMPLES Deceptive mortgage servicing: Loan modifications: Agreements: sending permanent loan modification agreements containing incorrect terms, not executing agreements, then sending updated agreements with materially different terms. Servicing transfers: collecting original mortgage payment amounts from borrowers on a trial modification. Eligibility: misrepresenting benefits/drawbacks of different options. Dual tracking Short sales: misrepresenting that a servicer would not seek a deficiency judgment from a short sale PMI: misrepresenting right to cancel private mortgage insurance klgates.com 13

14 UDAAP OVERVIEW: ABUSIVE DEFINITION An act or practice is generally abusive when: It materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or It takes unreasonable advantage of: A lack of understanding on the part of the consumer of the material risks, consists, or conditions of the product or service; or The inability of the consumer to protect the consumer s interests in selecting or using a consumer financial product or service; or The reasonable reliance by the consumer on a covered person to act in the interests of the consumer. klgates.com 14

15 UDAAP OVERVIEW: ABUSIVE EXAMPLES Threatening to take any action against a consumer that is not intended or that is not authorized, including false threats of lawsuits, arrest, prosecution, or imprisonment for nonpayment of a debt. Misrepresenting whether information about payment or nonpayment would be provided to a credit reporting agency. klgates.com 15

16 Hot UDAAP Issues and Agency Focus

17 SERVICING AND COLLECTION Final Rule: Amendments to 2013 Mortgage Rules under the Real Estate Settlement Procedures Act (Regulation X) and the Truth in Lending Act (Regulation Z) (Aug. 4, 2016) Protections of Regulation Z s mortgage servicing rules extend to confirmed successors in interest CFBP finds that applying rules to confirmed successors in interest serves the consumer protection purposes of the Dodd-Frank Act, namely, ensuring markets for financial products are fair, consumers are provided with timely and understandable information, and markets operate transparently CFPB rejected comments requesting a safe harbor for confirmation decisions or indicate that incorrect successorship determinations or nondeterminations do not give rise to claims of unfair, deceptive, or abusive acts or practices klgates.com 17

18 SERVICING AND COLLECTION Disclosure Issues CFPB proposed updates to Know Before You Owe mortgage disclosure rule on July 29, 2016 Reverts back to including the finance charge as part of the total of payments disclosure Clarifies how a creditor may provide separate disclosure forms to the consumer and the seller Supervisory Highlights, Mortgage Servicing, June 2016 Describes deceptive practice of disclosing terms of a payment plan that deferred mortgage payments for daily simple interest mortgage loans CFPB describes practice warning borrowers who were current on their low-balance HELOCs that foreclosure would be imminent as deceptive klgates.com 18

19 CREDIT CARDS Rewards Programs: cashback ; miles ; other Over half of all consumers say they select credit cards based on the rewards they provide CFPB Director Richard Cordray 70% of annual fees assessed by issuers on rewards accounts CFPB Dec CARD Act Consumer Credit Card Market report highlighted rewards programs as an area of potential concern Disclosures availability; timing; marketing blurred with disclosure Open-ended terms e.g., right to revalue rewards Complexity of earning and redeeming; forfeiture and expiration Value indeterminacy and consumer choice July 2016 Monthly Complaint Report credit card spotlight consumers continue to complaint about misleading rewards programs klgates.com 19

20 CREDIT CARDS klgates.com 20

21 CYBER SECURITY AND PRIVACY In the Matter of: Dwolla, Inc. Respondent: Third-party payment processor that allows consumers to become members by providing sensitive financial information and to then transfer funds to other members Alleged Deceptive Practices: Misrepresentation: employed reasonable and appropriate measures Represented that network and transactions were safe and secure Represented that transactions were safer than credit cards and less of a liability for both consumers and merchants Misrepresentation: data-security met or exceeded industry standards Represented information stored in a bank-level hosting and security environment Represented data encrypted utilizing the same standards required by the federal government klgates.com 21

22 CYBER SECURITY AND PRIVACY In the Matter of: Dwolla, Inc. Alleged Deceptive Practices: Misrepresentation: information is securely encrypted and stored Respondents claimed to encrypt data in transit and at rest website, mobile applications, connection to financial institutions, back end and even APIs use the latest encryption and secure connections Actual Practices: Did not employ reasonable measures to protect consumer information from unauthorized access Did not meet or exceed industry standards regarding data security Transmitted sensitive consumer information without encrypting Encouraged submission of sensitive consumer information via in clear text Remedy: $100,000 CMP; designate data-security coordinator; conduct biannual security risk assessments; etc. klgates.com 22

23 OVERDRAFTS AND THIRD-PARTY VENDORS In the Matter of: Santander Bank, N.A. Respondent: National bank with $58.5MM in domestic deposits Alleged Deceptive Practices: Respondent hired third-party vendor to conduct telemarketing to increase opt in participation in service that allowed consumers to complete a transaction even in the event of overdraft Failure to obtain affirmative opt in from consumers before charging multiple fees associated with overdraft service Affirmatively misled consumers about the policies and fees associated with opting in to the overdraft service to encourage consumer participation Told consumers the overdraft service was free if they opted-in Threatened to charge consumers fees for overdrafts even if they did not opt-in to the service klgates.com 23

24 OVERDRAFTS AND THIRD-PARTY VENDORS In the Matter of: Santander Bank, N.A. Alleged Deceptive Practices: Respondent, through its telemarketing vendor, mislead consumers about fees Paid vendor variable premium if vendor hit specified sales targets, and vendor established sales quotas for its employees Vendor did not ask consumers if they wanted to opt-in Vendor enrolled customers without their consent or knowledge Vendor stated customers were opting-in to a free service Vendor said customers would be charged only one fee Vendor told customers this is not a sales call Vendor told customers they would not pay a fee if the overdraft was repaid in 5 days, or in an emergency situation Remedy: $10MM CMP; increased oversight of vendors contract terms; onsite visits and monitoring; etc. klgates.com 24

25 PAYMENT PROCESSORS CFPB v. Intercept Corp, et al., 3: (D.N.D.) Defendants: Third-party payment processor Intercept; clients include payday lenders, auto title lenders, sales finance companies, etc. President of Intercept (individual) and CEO of Intercept (individual) Status: Suit filed June 2016 in federal district court Defendants motion to dismiss is pending klgates.com 25

26 PAYMENT PROCESSORS CFPB v. Intercept Corp, et al., 3: (D.N.D.) Alleged Unfair Practices: Defendants processed payments for clients they knew or should have known were engaged in fraudulent or illegal transactions. Defendants ignored red flags, including: Consumer complaints, including 600 calls from consumers between June and August 2012 and 1,800 disputed charges from Warnings raised by banks, including termination of relationships and statements that Defendants clients were not clean business Unusually high return (i.e., charge back) rates In 2012, overall return rate in processing industry was 1.5% Many of Intercept s clients generated returns of 20% to 40% State and federal law enforcement actions against clients Ex: Intercept processed withdrawals described in an FTC lawsuit against a client of Intercept klgates.com 26

27 PAYMENT PROCESSORS Dwolla and Intercept appear to indicate the focus on activities and responsibilities of payment processors Defining payment processors as covered persons may indicate CFPB s assertion of authority to investigate all paymentprocessor transactions including those that have nothing to do with financial services. Intercept parallel to 2013 Justice Department initiative Operation Choke Point What is the obligation of payment processors to monitor clients business? Monitor state laws? Investigate allegations of fraud? klgates.com 27

28 DEPOSIT DISCREPANCIES In the Matter of: Citizens Financial Group, 15-CFPB-0020 Respondents: Bank holding company; subsidiary banks Alleged Unfair Practices: For small discrepancies, banks would credit amount on deposit slip, which harmed consumers if amount was less than actual deposit Practices were contrary to bank policy and compliance failure went undetected by holding company due to oversight failures. Bank holding company performed centralized compliance management for [subsidiary] banks Alleged Deceptive Practices: Disclosures represented that consumer deposits would be verified and that banks would ensure accurate amounts credited Respondents failed to disclose the true practice for resolving discrepancies resulted in consumers receiving less than full credit for their deposits klgates.com 28

29 DEPOSIT DISCREPANCIES Interagency Guidance Regarding Deposit Reconciliation Practices (May 18, 2016) Agencies: Board, CFPB, FDIC, National Credit Union Administration, Comptroller of Currency Credit Discrepancy: When a consumer makes a deposit, for a number of reasons, the amount credited to the account may differ from the amount the consumer deposited Potential Consumer Harm: It is a detriment to the consumer and benefits the financial institution if [credit discrepancies] are not appropriately resolved Discrepancies may leave consumers without timely access to funds klgates.com 29

30 DEPOSIT DISCREPANCIES Interagency Guidance Regarding Deposit Reconciliation Practices (May 18, 2016) Rule: Financial institutions expected to adopt deposit reconciliation policies and practices that are designed to avoid or reconcile discrepancies, or designed to resolve discrepancies such that customers are not disadvantaged. Expected to resolve discrepancies within timeframes prescribed by Expedited Funds Availability Act and Regulation CC. Should implement effective compliance management systems that include appropriate policies, procedures, internal controls, training, and oversight and review processes to ensure compliance with applicable laws and regulations, and fair treatment of customers. Must provide customers with accurate information about processes. klgates.com 30

31 Recent Developments in Fair Lending Andrew C. Glass Partner K&L Gates LLP Copyright 2016 by K&L Gates LLP. All rights reserved.

32 OVERVIEW Fair Lending Litigation Redlining Developments HUD Guidance on Limited English Proficiency klgates.com 32

33 Fair Lending Litigation klgates.com 33

34 INCLUSIVE COMMUNITIES APPLIED On remand, the district court emphasized that in Inclusive Communities, the Supreme Court imposed a strict standard for proving disparate impact under the Fair Housing Act Inclusive Cmtys. Project, Inc. v. Texas Dep t of Hous. & Cmty. Affairs, 2016 WL (N.D. Tex. Aug. 26, 2016) The district court dismissed the disparate-impact claim (it had previously dismissed the disparate-treatment claim), holding: A challenge to a subjective policy (such as the tax-credit policy at issue) gives rise (if at all) to disparate treatment, not disparate impact Even if a subjective policy could give rise to disparate impact, plaintiffs did not meet Inclusive Communities robust causality requirement In particular, plaintiffs failed to show that defendant s use of discretion gave rise to the alleged disparity in housing opportunities, and that other factors (such as zoning rules and community preferences) had not caused the disparity klgates.com 34

35 MUNICIPAL FAIR HOUSING ACT CASES U.S. Supreme Court is currently reviewing City of Miami v. Bank of America/Wells Fargo with argument scheduled for November 8, amicus briefs were filed in support of the lenders, including a brief from the lending industry trade organizations 13 amicus briefs were filed in support of Miami, including briefs from the United States, various civil rights groups, and 26 municipal entities Many of municipal entities which joined in an amicus brief have not sued but describe their interests as being in alignment with Miami s Import: If the Supreme Court finds for Miami, then municipalities across the country may have Fair Housing Act standing to sue lenders and servicers of debt that have caused alleged economic injury versus discrimination injury klgates.com 35

36 MUNICIPAL FAIR HOUSING ACT CASES The Supreme Court will review two questions: Whether the Fair Housing Act imposes a statutory standing (or zone-of-interests ) requirement more stringent than the injury-infact requirement of Article III, and whether Miami s claim falls within the Act s zone of interests. Whether the remoteness of a plaintiff s injury is relevant to meeting the Fair Housing Act s proximate-cause requirement, and whether Miami pleaded an injury proximately caused by a Fair Housing Act violation Two cases set stage for resolution for City of Miami: Thompson v. N. Am. Stainless, LP, 562 U.S. 170 (2011) Title VII case criticizing earlier Fair Housing Act standing decision Lexmark Int'l, Inc. v. Static Control Components, Inc., 134 S. Ct (2014) Economic injury divorced from purpose of statute is not enough to show proximate cause klgates.com 36

37 CHALLENGE TO HUD DISPARATE-IMPACT RULE HUD disparate-impact rule remains under fire Insurance trade organizations filed lawsuits challenging the disparate-impact rule PCIAA v. Donovan, No. 13-cv (N.D. Illinois) In response to court order, HUD recently issued supplemental response to insurance industry comments regarding the use of commonly accepted risk factors in underwriting HUD rejected the industry s call for a disparate-impact safe harbor for the use of risk factors; whether disparate impact exists must be determined on a case-by-case basis AIA/NAMIC v. HUD, 13-cv (D.D.C.) Summary judgment challenge pending Lending industry trade organizations submitted amicus briefs klgates.com 37

38 CHALLENGE TO HUD DISPARATE-IMPACT RULE Lending industry amicus brief argued: HUD rule disregarded Inclusive Communities and Wards Cove Packing Co. v. Atonio, 490 U.S. 642 (1989), which provide the proper legal standard for disparate-impact liability Rule fails to require (1) isolation of specific policy that allegedly caused impact and (2) showing that impact is statistically significant Rule requires defendant to prove that practice is necessary to achieve substantial, legitimate, nondiscriminatory interests Rule does not require plaintiff to show less discriminatory alternative is equally effective in serving defendant s interests HUD improperly adopted aspects of Title VII that it took act of Congress to create and then only chose plaintiff-friendly aspects For example, Congress required a showing of discriminatory intent to recover money damages in Title VII cases, but the HUD rule does not impose the same limitation klgates.com 38

39 Redlining Developments klgates.com 39

40 REDLINING Redlining is a high priority for government agencies, which are aggressively investigating potential actions Government defines redlining as provid[ing] unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property is located The Fair Housing Act (HUD) and ECOA (CFPB) are the bases for government redlining actions Redlining cases are based largely on statistical disparities between the target institution and its peers in a defined assessment area klgates.com 40

41 REDLINING Government agencies rely on (1) data collected from the financial institutions and (2) a defined geographical area when investigating redlining claims The Community Reinvestment Act (CRA) assessment area is often the boundary used for a distribution analysis in investigating potential redlining But, in an emerging trend, government agencies may consider a reasonably expected market area (REMA) which considers a number of factors, including: CRA assessment area Marketing and lending area Location of branches klgates.com 41

42 REDLINING How is redlining evaluated? A failure to receive applications and make loans at the same rate as others in minority areas because of race or national origin? A failure to receive applications and make loans in minority areas because of race or national origin? Two different analyses Proportional distribution analysis Loan volume analysis klgates.com 42

43 REDLINING Proportional Distribution Analysis What is a minority area? What loans should be included? What peers should be examined? Comparable application or lending volume Comparable institutions What is the appropriate geography to analyze? Loan Volume Analysis How many loans (counts) are made in minority areas? How many loans (counts) are other lenders making in minority areas? What other lenders are making loans in minority areas, and are they peers? klgates.com 43

44 REDLINING BancorpSouth Bank Settlement Government alleged bank denied African Americans loans more often than non-hispanic whites, charged African Americans more despite similar loan qualifications Bank paid $4M in direct loan subsidies in minority neighborhoods, $800,000 for community outreach, $2.78M to African-American consumers affected, and $3M penalty Hudson City Savings Bank Settlement Government alleged bank structured business to avoid lending to residents in majority-minority neighborhoods such that bank received applications at much lower rate than peer lenders Bank paid $27M for a loan-subsidy program and $5.5M penalty, and opened branches in majority-minority communities klgates.com 44

45 HUD Guidance on Limited English Proficiency klgates.com 45

46 HUD GUIDANCE ON "LEP On September 15, 2016, HUD released guidance regarding complying with the Limited English Proficiency (LEP) provision of the Fair Housing Act Guidance notes that while not per se actionable under the FHA, language discrimination is inextricably intertwined with national origin discrimination, citing court decisions Guidance provides examples of intentional discrimination (through direct or circumstantial evidence): Advertisements requiring fluency in English to apply for housing Turning away applicants who are not fluent in English Reverse redlining or targeting individuals with limited English fluency for unfair or discriminatory housing services klgates.com 46

47 HUD GUIDANCE ON "LEP" Guidance outlines disparate-impact standard: Census data regarding national origin, language spoken, age, and citizenship can be used as evidence Language restrictions must be necessary to achieve a substantial, legitimate, nondiscriminatory interest Many business justifications used in employment context (e.g., need for cohesive workforce) will likely not apply in housing context Guidance does not examine how costs of complying with LEP may affect reasonable business decisions Guidance is unclear as to what less discriminatory alternatives might be required klgates.com 47

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49 Fair Lending and UDAAP Quantitative Analysis Fall 2016 Consumer Financial Services Symposium Arthur P. Baines Charles River Associates K&L Gates Consumer Financial Services Symposium

50 Quantitative Analytics topics Servicing indirect Auto Direct and Indirect Damages in Auto Statistical Analysis in Redlining 50

51 Servicing Indirect Auto CFPB Supervisory process focused on servicing in indirect auto. What kinds of forbearance are available? What policies govern the process? How much discretion/judgement is involved? UDAAP or Fair Lending or both? Some parallels to HAMP servicing Who was offered what, and at what cost? Did the consumer realize a material/financial benefit? Differences in repossession rates? Differences in time to repossession? 51

52 Servicing Indirect Auto Analytical Challenges Data availability may limit the types of statistical testing that can be done. File review may be a pseudo-alternative, but do not expect the Agency to ascribe much value to it. What is the correct reference group? Which accounts sought a forbearance? Which accounts are eligible to be repossessed? An outcome path can be helpful. Identify accounts that fall behind Map the outcomes: cure, forbearance, repossession, other Compute the average timing to each outcome Test for difference in rates by prohibited basis. 52

53 Transaction Testing High Risk Areas Identified Does forbearance consider ability to repay? Does product profitability depend on penalty fees or back-end rather than finance charges and/or upfront fees? Does product have high rates of re-pricing or changes in terms? Does combination of terms increase difficulty in understanding? Are there penalties for terminating relationship? Does consumer bear fees or costs to get information about own accounts? Is product targeting to particular populations without making sure marketing, disclosures suit that population? What behavior is incentivized by employee compensation structure? 53

54 Direct and Indirect Damages in Auto CFPB s calculation of direct damages is based on a disgorgement theory. It is completely bifurcated from the question of who receives the money. It assumes that BISG accurately estimates the share of the portfolio that belongs to the relevant group. To the extent BISG overestimates that share, the direct damage amount will be equally overestimated. Indirect damages are a fixed dollar amount: Per member of the relevant group, regardless of whether the individual was harmed. Large range of per person amount. Assumes BISG accurately estimates the number of consumers in the relevant group. 54

55 Fair Lending Redlining Analyses Measurement Redlining investigations focus on geography generally by looking at the percentage minority in particular census tracts or by looking at the market share on one institution compared to others offering the same product in the same geography First look at originations for City Bank as % in majority minority tracts compared to total originations Next, calculate shares of City Bank in low, or high minority tracts compared to peers shares in those tracts Measure statistically significant differences. Total Count Majority Minority Tracts Count % Originations Majority African American and/or Hispanic Tracts P- Value Count % P- Value % Low Tract Minority Share (< 25%) P- Value % High Tract Minority Share ( 75%) P- Value Low Minority Share / High Minority Share 55

56 Redlining Analysis 56 Peer comparisons in major markets Mapping of applications, originations and branches in relation to minority population Especially important for brick and mortar retail lenders even non-banks Understand the reasons for your lending distribution

57 Example of Redlining Peer Analysis Total Originations in Majority Minority Tracts Total Applications in Majority Minority Tracts Lender Originations Number % Significance Applications Number % Significance Target Lender 2, %. 2, %. Peer Group 28,242 4, % < 1% 44,392 8, % < 1% Peer Lender 1 4,040 1, % 5,750 1, % Peer Lender 2 1, % 2, % Peer Lender 3 1, % 2, % Peer Lender 4 1, % 2, % Peer Lender 5 1, % 2, % Peer Lender 6 1, % 2, % Peer Lender 7 1, % 5,632 1, % Peer Lender 8 1, % 2, % Peer Lender 9 1, % 2, % Peer Lender 10 3, % 5, % Peer Lender 11 1, % 2, % Peer Lender 12 1, % 3, % Peer Lender 13 1, % 1, % Peer Lender 14 1, % 1, % Peer Lender 15 1, % 1, % Note: Fictitious data.

58 Redlining Example: Hudson City Applications, NY/NJ, Camden & Bridgeport MSAs Source: CFPB Consent Order, Sept. 2009

59 Redlining Example: Hudson City Applications, NY/NJ, Camden & Bridgeport MSAs Source: CFPB Consent Order, Sept. 2009

60 Key Recommendations to Mitigate Redlining Risk Monitoring requires statistical peer analysis of applications and originations, including new market share analysis Location must assess credit needs of community, with particular focus on minority neighborhoods. Determine not only where the focus is currently lacking, but where the peers are! Hiring need trained staff and loan officers might want Spanish speaking for minority neighborhoods (required for Hudson) Be proactive the costs of failure or drawing the attention of the regulator well exceed the legal/statistical cost of identifying risks and proactively remediating those risks 60