PNC 'Disparate Impact' Investigation Just the Start, Lenders Fear

WASHINGTON — A probe into PNC Financial Services' mortgage lending is stoking fears that regulators are preparing to crack down on other large banks for alleged loan discrimination.

The Pittsburgh-based bank disclosed last week that it is under investigation by the Justice Department and the Consumer Financial Protection Bureau for its mortgage pricing, with regulators citing a so-called "disparate impact" on a certain class of borrowers. It marked the first time the CFPB has publicly pursued a bank using the controversial legal theory, which is used to cite a bank for discrimination — even if it is unintentional — if a policy, product or practice has an adverse impact on a protected class.

Many see it as just the start of the CFPB's activities in that area as regulators seek to ramp up the use of disparate impact in light of new mortgage rules and ahead of a pending Supreme Court case that could undermine the theory.

"All of this may be taken away from regulators in the future depending on the Supreme Court's decision," said Michael Mierzewski, a partner at Arnold & Porter. Until then, "I think the regulators would like to take advantage of this as much as they can before the Supreme Court rules."

Bankers are particularly concerned that more disparate impact issues may crop up as a result of the CFPB's new "qualified mortgage" rule due to go into effect in January. Under the definition, lenders must comply with certain underwriting standards, including a debt-to-income ratio. But lenders fear that in their effort to make QM loans, they could inadvertently discriminate against minorities or women who do not qualify for such loans.

"The QM rule is creating a new screening process" based on a borrower's debt-to-income ratio "so we start putting people into different buckets based on those who qualify and those who don't," said Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer Financial Services. "Many lenders are saying, 'whoa, if I do QM loans, am I going to be exposing myself to litigation based on what I thought was a faithfully neutral policy?'"

Ronald L. Rubin, a former CFPB enforcement attorney who is now a partner in the Hunton & Williams' Washington office, agreed it was an issue, but said the agency would not undermine QM.

"The CFPB would be reluctant to actually take enforcement action against a lender that was making decisions based on the bureau's own rules," he said.

But that caution may not apply to the Justice Department or attorneys general who could pursue banks for alleged discrimination based on QM loans.

The Justice Department has "made it very clear that it will use the theory of disparate impact in enforcement actions," said Kramer, a former deputy superintendent of banks for the New York State Banking Department. As a regulator "in the early 2000s, we used it through our enforcement because we believed it was an effective, appropriate tool to use when examining and monitoring lenders."

But regulators have started using disparate impact more since then, particularly since the CFPB's formation three years ago.

There have "been a number of matters brought by federal agencies involving discrimination that resulted in discretion of pricing, both in auto lending and in other product markets like mortgages," Patrice Ficklin, the CFPB's assistant director of fair lending and equal opportunity, said Aug. 6 in a Web seminar with regulators on fair auto lending.

PNC's case follows similar settlements on mortgage discrimination in which Wells Fargo paid $175 million and Bank of America paid $335 million to settle a case involving the mortgages from its 2008 acquisition of Countrywide Financial. Similarly, PNC said the mortgages under investigation were largely from its 2008 acquisition of National City Corp. In June, PNC was notified that the CFPB received authorization to enter into settlement discussions while the Justice Department was authorized to file a civil lawsuit, according to the recent filing.

"Our practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described in this note," PNC said in the filing. A spokesperson for the bank declined to comment.

But regulators may be running out of time to employ disparate impact due to a pending high court case involving a community redevelopment project in Mount Holly, N.J. Many observers believe the Supreme Court, which is set to hear the case this fall, will limit or exclude the use of disparate impact through that rule.

The CFPB may also feel more confident in employing disparate impact considering questions about its leadership have now been solved. Another Supreme Court case concerning recess appointments could have thrown CFPB Director Richard Cordray's tenure into doubt, but was resolved last month when the Senate unexpectedly confirmed Cordray for a full term.

"The safest strategy for the CFPB is to go after the low-hanging fruit first, and disparate impact actions are rarely low-hanging fruit," Rubin said. "However, now that Richard Cordray has been confirmed, the bureau is a lot less worried about falling off a ladder."