Fair & Responsible Lending in the Regulatory Crosshairs

Transcription

1 Fair & Responsible Lending in the Regulatory Crosshairs Legal Counsel to the Financial Services Industry Minnesota Banking Law Institute April 5, 2013 Andrea K. Mitchell Partner Lori J. Sommerfield Counsel

2 Overview Fair & Responsible Lending Laws and Regulations Disparate Impact Theory in Focus Regulatory & Enforcement Landscape Examination, Investigation & Enforcement Trends Fair & Responsible Lending Best Practices CFPB Priorities: Looking Ahead 2

3 Fair Lending Laws and Regulations Fair Lending Laws and Regulations Equal Credit Opportunity Act / Regulation B Fair Housing Act / 24 C.F.R. Part 100 Section 1(a) of the National Bank Act (12 U.S.C. 1(a)) Fair Lending-Related Laws and Regulations Home Mortgage Disclosure Act (HMDA) / Regulation C Community Reinvestment Act (CRA) / Regulation BB 3

4 Responsible Lending Laws Responsible Lending Laws Unfair or Deceptive Acts or Practices ( UDAP ) (Sec. 5 of FTC Act, 15 U.S.C. 45) Unfair, Deceptive or Abusive Acts or Practices ( UDAAP ) (Sec of Dodd-Frank Act, 12 U.S.C. 5536) Servicemembers Civil Relief Act ( SCRA ) (50 U.S.C. App. 501 et seq.) Federal, state and local laws prohibiting predatory or abusive lending or servicing practices Federal, state and local laws restricting high-cost residential loans, including the Home Ownership and Equity Protection Act ( HOEPA ) (15 U.S.C. 1639) 4

5 Disparate Impact Theory in Focus 5

6 Disparate Impact Background DOJ began aggressively enforcing fair lending laws under the disparate impact theory in January 2010 CFPB Bulletin on Lending Discrimination (April 18, 2012) Reaffirms that CFPB will use disparate impact theory in exercising its supervision and enforcement authority Fair Notice on Fair Lending (Patrice Ficklin blog, April 18, 2012) First indication that CFPB will strongly enforce fair lending laws against lenders 6

7 Disparate Impact HUD Final Rule Final rule issued by HUD on February 8, 2013 Published February 15, 2013 (78 Fed. Reg ) Effective March 18, 2013 Rule defines discriminatory effect as a practice that actually or predictably results in a disparate impact on a group of persons on a prohibited basis Expands grounds for legal challenges by permitting claims that a practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns 7

8 Disparate Impact HUD Final Rule (cont.) Establishes standards for determining whether a policy or practice has a disparate impact by adopting three-part burden-shifting test Does not specify that a plaintiff s proposed less discriminatory alternative to the defendant s challenged practice must be equally effective in furthering the defendant s legitimate specified interest Preamble states that the defendant s substantial, legitimate, nondiscriminatory interest is equivalent to the business necessity standard set forth in earlier Interagency Policy Statement New language in final rule states that mortgage servicing falls within the purview of the Fair Housing Act 8

9 Disparate Impact How to Comply with HUD s Final Rule? Rule applies only to Fair Housing Act No one size fits all approach; will differ by financial institution size, complexity and resources Threshold question: When does a new product or material revision to an existing product or policy require a disparate impact analysis? 9 Conservative interpretation would require conducting a retrospective and prospective disparate impact analysis for all products/policies that present risk

10 Disparate Impact How to Comply with HUD s Final Rule? (cont.) Some suggest that the rule requires lenders to create written business justifications for policies and practices on the front end to demonstrate that the business necessity is not hypothetical or speculative Uncertainty about methodology for identifying less discriminatory alternatives 10

11 Regulatory & Enforcement Landscape 11

12 Regulatory & Enforcement Landscape CFPB has indicated that it will make fair lending a component of every examination it performs CFPB is still developing fair lending analytical capabilities Disparate impact theory applied to all aspects of the credit transaction Continued aggressive enforcement of fair lending laws by DOJ, CFPB, HUD, and prudential banking agencies During 2012, prudential banking regulators made over 20 pattern or practice referrals to DOJ Many other referrals in pipeline 12

13 Regulatory & Enforcement Landscape (cont.) Prudential regulators still retain some fair lending examination and enforcement authority over banks with assets greater than $10 billion Community Reinvestment Act Retain authority to examine and enforce Fair Housing Act Together with HUD, prudential regulators retain authority to examine and enforce UDAP Some fair lending issues can be investigated as unfair and deceptive acts or practices under Section 5 of FTC Act. Prudential regulators may enforce violations under Section 8 of FDI Act. 13

14 Regulatory & Enforcement Landscape (cont.) Recent DOJ fair lending settlements have been largest in history Bank of America/Countrywide - $335 million Wells Fargo - $175 million SunTrust - $21 million HUD has significantly increased its focus on fair lending Disparate impact rule Aggressive pursuit of fair lending complaints Prudential regulators continue to investigate and enforce fair lending violations for banks with assets under $10 billion 14

15 Regulatory & Enforcement Landscape (cont.) UDAAP/UDAP Consent Orders: Capital One 7/18/12 $150 million refund to 2 million customers $25 million civil money penalty to the CFPB $35 million civil money penalty to the OCC Discover 9/24/12 $200 million refund to 3.5 million customers $14 million civil money penalty (CFPB and FDIC) American Express 10/1/12 $85 million refund to 250,000 customers $27.5 million civil money penalty 15

16 Examination, Investigation & Enforcement Trends 16

17 Examination Trends Trends in recent CFPB examinations Document and information requests are voluminous and issued with aggressive production deadlines Most of the examination process occurs onsite Off-site work may continue for several months Frequent turnover of examination team members Enforcement attorneys attend kick-off meetings and may be involved in other aspects of the exam Examination reports have rarely been issued 17

18 Examination Focal Points: Residential Mortgage Loans Product offering Lenders not allowed to offer only jumbo products or have high minimum loan amounts Pricing disparities Pricing disparities of 6-25 bps can result in DOJ referral Pricing disparities not restricted to overall APR (isolated disparities in fees, overage, underage) Permissible downward adjustments not reflected on rate sheet Wholesale lenders accountable for pricing disparities (or steering) by brokers Underwriting disparities Consistent level of service Discretion in exceptions authority 18

19 Examination Focal Points: Residential Mortgage Loans (cont.) Access to credit Redlining (investigations ongoing; settlements with DOJ & HUD) Reduction / termination of home equity lines of credit Business models shifting focus to private banking/accommodation lending Credit overlays Maternity leave / disability discrimination Higher minimum FICO for FHA loans 19

20 Examination Focal Points: Residential Mortgage Loans (cont.) Potential for discrimination in loan servicing continues to receive attention Increasing focus on servicing and loss mitigation: Inconsistent levels of service and loss mitigation terms between protected class consumers and others Disparities in loss mitigation outcomes on prohibited bases Differential marketing and maintenance of REO properties Compliance with SCRA requirements (no CFPB jurisdiction) 20

21 Examination Focal Points: Credit Cards Marketing models target borrowers on prohibited bases or contain suppression criteria that exclude people in protected classes Marketing materials do not reflect racial or ethnic diversity Poor minority market penetration of card products Age-split scorecard that has adverse impact on older applicants Inconsistent levels of service in approving application or in loss mitigation efforts 21

22 Examination Focal Points: Credit Cards (cont.) Adverse action notice violations after account opening (refusal to lower APR, refusal to approve payment plan) Customer service representative discretion in fee waivers, rate reductions and other material account terms Lack of fair lending testing and monitoring 22

23 Examination Focal Points: Indirect Auto Lending Generally accepted that indirect auto lenders are creditors for purposes of ECOA CFPB has analogized indirect auto lending practices to mortgage broker compensation practices (i.e., YSP = dealer mark-up), so pricing (dealer mark-up and borrower APR) is regulatory focus According to CFPB, there have been a significant number of fair lending referrals of indirect mortgage lenders to DOJ Settlement agreements with captive auto lenders from 2000 to 2006 have expired, but many financial companies have reportedly maintained caps required under the settlements (typically bps) CFPB Bulletin : Indirect Auto Lending and ECOA Compliance 23

24 Investigation & Enforcement Trends Practices that were deemed acceptable by the prudential regulators are no longer acceptable CFPB / prudential regulators still working on cooperation and information sharing but still forging new partnerships Successful defense of alleged violation of one consumer protection statute may still result in UDAAP violation Self-reporting does not appear to have materially reduced likelihood of issuance or severity of enforcement action Process for CFPB enforcement group to make legal determinations concerning violations has been lengthy 24

25 Fair & Responsible Lending Best Practices 25

26 FRL Best Practices Treat consumers and customers fairly and equitably across the loan life cycle Formally consider FRL issues in business strategies prior to implementation Conduct an FRL risk assessment at least annually to determine areas of elevated risk and adequacy of control environment Marketing and advertising Evaluate marketing models, selection and targeting criteria for potential fair lending and UDAAP issues Ensure diversity of images in advertising Provide clear and conspicuous consumer disclosures Clearly disclose interest rates and fees Evaluate fees for reasonableness 26

27 FRL Best Practices (cont.) Underwriting and pricing Implement controls to mitigate fair lending risk within the credit life cycle where human discretion is involved (e.g., judgmental underwriting, pricing exceptions) Document business justification for credit or pricing models and use of non-bureau attributes and credit overlays Periodically review non-bureau attributes and credit overlays Develop defined criteria for any judgmental underwriting use and implement controls to ensure consistency among underwriters Monitor underwriting and pricing exceptions to set thresholds Conduct ongoing monitoring and testing Account servicing/account management Ensure fair and consistent treatment in credit line increases/decreases, account closures, fee waivers and collections 27

28 FRL Best Practices (cont.) Loss mitigation/foreclosure Review loss mitigation and foreclosure processes for fair lending, UDAAP and SCRA compliance Third-party relationships Due diligence, FRB contract reps and warranties, and ongoing monitoring advised Incentive compensation Evaluate compensation plans to ensure that incentives are aligned with compliance requirements Consumer complaints Maintain a robust consumer complaint management program to ensure that FRL complaints are properly identified, promptly responded to, and monitored or escalated, if needed CFPB wants to know that financial institutions are reviewing complaints for service, compliance and operational risk concerns 28

29 29 CFPB Priorities: Looking Ahead

30 CFPB Priorities Director Cordray announced CFPB s top priorities for supervision, regulation and enforcement on February 26, 2013: Deceptive and misleading marketing of consumer financial products and services Debt traps Dead ends Discrimination 30

31 CFPB Priorities (cont.) Anticipated short-term focal points: Mortgage, TILA, HMDA rules Indirect auto Prepaid cards Student loans Expected longer-term focal points: Debt collection/deterioration of data integrity over time Payday loans/overdraft services Online and offshore consumer financial products and services Small business data collection and reporting rule Consumer disclosures/forms in languages other than English 31

32 Questions Andrea Mitchell Lori J. Sommerfield