The Consumer Financial Protection Bureau is targeting three areas in an increased focus on preventing discriminatory lending practices.
“While the bureau has taken important strides in our efforts to protect consumers from credit discrimination and broaden access to credit, we continue to identify new and emerging fair lending risks and we will monitor institutions for compliance,” said Patrice Ficklin, the CFPB’s associate director of fair lending, in a December 2016 blog post.
Key priorities
Ficklin announced in the blog post the CFPB’s top three fair lending priorities for 2017 to safeguard consumers from discriminatory lending. Those priorities include:
• Redlining (to determine if lenders are intentionally avoiding lending in minority neighborhoods);
• Mortgage and student loan servicing (to ascertain whether borrowers who are behind on their student loan or mortgage payments are facing more challenges in working out possible solutions with the lenders due to their ethnicity or race); and
• Small business lending (to evaluate if discriminatory practices are occurring for minority-owned or women-owned businesses when they apply for credit).
Cy Richardson, senior vice president for economics and housing programs at the National Urban League in New York, said his organization supports the CFPB’s fair lending priorities.
“The CFPB plays a critical role in protecting all American consumers from abuses while also working to prevent discrimination by identifying best practices and abuses,” Richardson said. “The National Urban League has many banking partners, and many lenders such as large banks have good compliance standards in place. However, the financial system is complex and there are newer, smaller lenders and other actors out there, some of which are less informed regarding compliance. Redlining can be like old wine in a new bottle — having regional nuances and variants to it.”
Regarding mortgage and student loan servicers, Richardson said abuses generally occur in the areas of collection practices “which disproportionately have a greater impact on communities of color.”
Richardson said examples of abusive practices committed by some lenders include threats to contact third parties, calling consumers at their place of employment and threats to publish public lists of consumers who refuse to pay debts.
“These and other tactics constitute abusive behavior within the debt collection industry, and are typically found in abundance in communities of color and other demographic enclaves that may lack a traditional financial literacy acumen or experience transacting in the economic mainstream,” he said.
Small business lending is another area where discriminatory practices can occur.
“By all standards and measures employed by lenders of all types within a risk-based lending framework, blacks and Hispanics have higher declination rates for small business loans than their similarly situated white counterparts,” Richardson said. “The lending pendulum has swung far too much toward risk mitigation and risk aversion. Communities of color tend to pay the price when this occurs.”
Industry reaction
Steve Zeisel, executive vice president and general counsel for the Consumer Bankers Association, said while the three fair lending priorities the CFPB identified will be areas of increased focus in 2017 they will likely not be the only issues the bureau will consider. He noted the transition to a new presidential administration could impact the CFPB in general and the fair lending priorities in particular.
In the interim, he said, the CFPB has been in “the process of implementing section 1071 of the Dodd-Frank Act, which enhances the Equal Credit Opportunity Act by requiring lenders to report the ethnicity and race of credit applicants applying for small business loans.”
In a May 2016 blog post, the CFPB stated the amendment to section 1071 of Dodd-Frank also would require lenders to provide more data for women-owned and minority-owned business loan applications. Zeisel said the bureau has not yet even begun the rulemaking process for this change, but it could prove costly for lenders should it come to fruition.
“Even just determining which businesses applying for credit are women-owned or minority-owned will sometimes prove difficult,” he said. “The CFPB also faces numerous challenges, such as defining applicants that are women-owned or minority-owned, what other types of information might be required, and how the information should be collected and reported.”
Lilly Thomas, senior vice president and senior regulatory counsel for the Independent Community Bankers of America, said “community banks have always supported the advancement of fair lending practices,” but regulatory enforcement efforts should not penalize institutions that are making good faith efforts at compliance.
“For those who intentionally discriminate, they should be dealt with to the full extent of the law,” Thomas said. “What we are concerned about are baseless charges and actions and overzealous enforcement regarding fair lending. When these occur, it places a heavy burden on community banks who endure reputational damage when they have not discriminated against anyone.”
Thomas said it can cost community banks a substantial amount of money to defend themselves against unwarranted charges of discrimination, as they must prove they have not engaged in discriminatory practices. Even if charges are dropped, these institutions often are left with the challenge of repairing their good names and regaining public trust, she said.
Thomas pointed out the CFPB has direct examination authority of federally insured banks with assets of more than $10 billion. Depending on their charter, banks with assets of $10 billion or less can be governed by different regulators such as the Federal Reserve, Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency or state regulators, she said.
“Different regulators will have their own focus areas or priorities when they examine their banks,” Thomas said. “For example, one regulator may focus more closely on redlining, while another on disparate impact.”
Freelance writer Carole Jakucs contributed to the writing and research of this article.
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