Acting CFPB chief signals tougher stance against redlining

Banking attorneys are bracing for an immediate sea change in the Consumer Financial Protection Bureau's approach to fair-lending cases even before the Biden administration's nominee to run the agency is confirmed.

Many in the industry view lending discrimination probes as a primary focus of acting Director Dave Uejio's tougher stance toward financial institutions compared to his predecessor.

Observers expect Uejio to revive the agency's controversial "disparate impact" standard — used to punish lenders that unintentionally discriminate against minorities — that the industry has long criticized. They expect him to fast-track investigations that could be reviewed by Rohit Chopra, once he is Senate-approved as the permanent director, for possible fines and other penalties.

“The playbook is to use the fair-lending hook to go after big banks and mortgage lenders whenever possible,” said Brian Levy, of counsel at the law firm Katten & Temple.

Uejio made clear his intent in a recent blog to be aggressive despite his interim appointment, taking a page from other interim appointees such as former acting CFPB Director Mick Mulvaney, who was an outspoken chief of the bureau until he passed the baton to Kathy Kraninger upon her Senate confirmation.

Bloomberg News (Kraninger and Chopra)

While Mulvaney and Kraninger slowed enforcement activity, and fair-lending cases in particular, Uejio signaled a return to Obama-era policies. More aggressive enforcement of fair-lending laws points to interest among Biden-appointed regulators in addressing racial-equity issues.

Uejio's post said the CFPB will consider using the disparate impact legal standard to punish lenders for discriminatory effects that result even from neutral policies.

“The country is in the middle of a long overdue conversation about race, and as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality,” Uejio wrote last week. “I am going to elevate and expand existing investigations and exams and add new ones to ensure we have a healthy docket to address racial equity.”

And such investigations will not be limited to mortgages and other consumer loans, he said. Lenders that took part in the Paycheck Protection Program to dispense government-backed loans to small businesses seeking pandemic relief could also be in the CFPB’s crosshairs.

"Examiners found that the widely used policy of banks only taking PPP applications from pre-existing customers may have a disproportionate negative impact on minority-owned businesses," he said.

His comments worry lenders that already go to significant lengths to avoid discrimination against minorities but are concerned that they could get punished anyway.

“Lenders are already fearful of this, they are already very aware of it," said Levy, adding that “lenders I’ve encountered don’t reject loans based on the color of someone's skin.”

Most banks and mortgage lenders think disparate impact is an unfair way to analyze the legality of financial institutions’ credit policies that determine lending decisions — specifically credit scores, loan-to-value ratios and a borrower’s income. These long-standing credit measures are said to have a disproportionate effect on minority neighborhoods.

Kali Bracey, a partner at Jenner & Block and a former CFPB senior counsel, said, "Financial institutions and nonbank mortgage lenders may find it intimidating to do a fair-lending analysis to make sure they are not having a disparate impact on fair lending with customers."

Moreover, in the wake of the murder of George Floyd and the social unrest that followed, the biggest banks specifically may be unwilling to fight the CFPB and have opposed any effort by trade associations to press back against disparate impact, sources said.

"All the different investigations are going to be a headline risk," said Ed Mills, a managing director and Washington policy analyst at Raymond James.

Democratic lawmakers criticized Kraninger for filing just two fair-lending enforcement actions in two years. None were filed under Mulvaney, whereas the agency issued 12 enforcement actions related to fair lending under former Obama-appointed Director Richard Cordray.

Uejio could be putting in motion a new set of priorities likely to be the focus of Rohit Chopra, a progressive consumer advocate chosen by the administration to run the agency longer-term. By initiating investigations now, the bureau does not have to wait for Chopra's confirmation process; he will be able to more quickly sign off on pending lawsuits and civil demands as soon as he starts.

Last year, banks joined civil rights groups and consumer advocates in urging the CFPB not to rush a proposed overhaul of the Equal Credit Opportunity Act. Under Kraninger, the CFPB proposed making changes to ECOA, the 1974 law that bars discrimination in any aspect of a credit transaction.

Under the Biden administration, the effort to change ECOA is expected to be scuttled as the CFPB takes an expansive view of the legal doctrine of disparate impact. Still, actual litigation under ECOA is rare, experts said, and the statute has never been the subject of a Supreme Court case.

“There is no corresponding Supreme Court case law having to do with disparate impact under ECOA but the CFPB’s position is that because ‘an effects test’ is specified in Regulation B, ECOA’s governing regulation, then disparate impact applies to ECOA,” Bracey said.

While the CFPB’s view on disparate impact is consistent with the Biden administration’s priorities on equity and fairness, the issue is still the subject of much debate.

When Republicans controlled the House Financial Services Committee, they issued reports claiming the CFPB does not have authority to use the disparate impact theory under ECOA, which is the only fair-lending statute under its authority.

Banks and lawyers representing lenders were dismayed by Uejio’s comments that appeared to call out financial firms on the issue of racial equity.

Lenders are concerned that the focus on enforcement will be punitive but that enforcement actions do not solve the pressing issues dealing with race that now are the subject of national debate.

“Fair lending, fair housing are actual problems,” said Levy, “But 50 years of fair-lending enforcement has not moved the needle in terms of the racial gap in housing. We need some new ideas.”

The CFPB under Uejio and then Chopra could face a legal challenge over its fair-lending authority.

Of the bureau's two fair-lending actions during the Trump administration, one went to court. In the only redlining case against a nonbank, last year the bureau alleged that the Chicago-based Townstone Financial engaged in “unlawful redlining” when the CEO made “discouraging statements” on radio programs that resulted in fewer Black applicants applying for loans.

But Townstone claims the CFPB is overstepping its authority under the ECOA.

Another issue the case raises is that nonbank mortgage lenders are not subject to the Community Reinvestment Act, so they currently have no legal obligation to market their loans in a specific geographic area, said Richard Horn, a partner and founding member of Garris Horn who represents Townstone.

“The bureau is reading into ECOA an affirmative obligation to market to specific areas,” said Horn, a former CFPB senior counsel and adviser. “They are turning a statute of exclusion into an obligation for mortgage lenders to go out and include and get enough business from minorities.”