Where CFPB will focus fair-lending probes under new chief

As Rohit Chopra gets set to take over the Consumer Financial Protection Bureau, many expect fair lending to be high on his agenda. But his anti-discrimination efforts could diverge from that of his predecessors.

Anti-redlining policies traditionally have been focused on mortgage lending. Analysts say housing will still be a priority, but the CFPB will likely also crack down on fair-lending violations for small-business loans governed by the Paycheck Protection Program.

Meanwhile, fair-lending investigations and penalties targeting allegedly biased underwriting algorithms could be a jumping off point for the bureau to address potentially discriminatory practices in the use of artificial intelligence.

“I think the first thing they're going to go after is fair-lending violations — big time,” said Scott Pearson, a partner at Manatt, Phelps & Phillips.

“They are going to target absolutely everybody who's using artificial intelligence, machine learning and automatic underwriting with algorithms,” said Pearson. “They're going to have a whole bunch of new fair-lending theories.”

The CFPB has been signaling all year that it plans to make racial equity and fair lending a major priority in investigations and exams. But precisely how Chopra, who was confirmed by the Senate last week in a party-line vote, might combat discriminatory lending has been the subject of some debate.

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The bureau has already warned mortgage servicers, credit bureaus and lenders that approved PPP loans that it is analyzing vast amounts of data to determine if unintentional discrimination resulted in harm to certain protected borrowers.

“Given the wide range of fair-lending concerns, it will come up in a variety of contexts including eviction, foreclosures and mortgage servicing in general, as well as credit reporting related to legal compliance issues from the pandemic,” said Quyen Truong, a partner at Stroock & Stroock & Lavan and a former assistant director and deputy general counsel at the CFPB. “A lot of the regulatory activities related to the pandemic will focus on the outsized impact on vulnerable populations, including racial minorities and low-income consumers.”

Acting CFPB Director Dave Uejio has been fast-tracking investigations for Chopra to review to ensure the CFPB has a healthy docket of cases dealing with racial equity. (Uejio will remain head of the bureau until Chopra leaves his current post on the Federal Trade Commission, which is expected to occur by late next week.)

Tackling the racial wealth gap and addressing issues of racial equity is a key policy goal of the Biden administration. Uejio also has said that the financial services industry both “caused and exacerbated racial inequality.”

By far the biggest concern for banks is if PPP loans land in the CFPB’s crosshairs. The CFPB has said it is looking at whether following the passage of last year's coronavirus rescue package, lenders prioritized PPP applications from pre-existing customers to a degree that minority-owned businesses were at a disadvantage seeking credit through the Small Business Administration program.

“What the banking agencies are going to be concerned with and in particular the CFPB is: Was there discrimination in how that money went out and who got access to it?” said Rachel Rodman, a partner at Cadwalader and a former CFPB senior counsel in the legal division. “Not only does that address issues relating to COVID, which are priority number one, [but] it gets right at issues of racial equity.”

The CFPB is expected to conduct a statistical analysis of PPP loans that filters the data to determine if race or gender or other characteristics played a role in which businesses were more easily able to obtain a PPP loan.

Many legal experts think the CFPB will use the “disparate impact” standard to punish lenders for discriminatory effects that were unintentional.

“It's not about discriminatory intent, it's about the effects of bank policies and if those policies — even if neutral on their face — resulted in an otherwise unexplainable difference between applicants who got the loans — and they're all white men, for example — and applicants who didn't,” said Rodman.    

Bank trade groups have lauded banks for working around the clock to dispense government-backed loans through the PPP. If PPP lenders land in the CFPB’s crosshairs for fair-lending violations, there is likely to be industry pushback. It could take a year or longer to build a strong case against a financial firm based on the loan data, experts said.

Chopra also is expected to finalize a rule requiring that small business lenders report data on the race, sex and ethnicity of the principal business owners of small businesses, as well as which applicants are denied credit.

The CFPB also has sent civil investigative demands to firms that are using alternative data and artificial intelligence in lending decisions that may run afoul of fair-lending laws.

The CFPB has authority to file enforcement actions for violations of the Equal Credit Opportunity Act. The ECOA prohibits credit discrimination on the basis of race, color, religion, national origin, sex, marital status, age, or because a person gets public assistance. Anticipating a crackdown, some fintech firms have requested that the CFPB provide specific guidance on how to use technologies in making lending decisions, even as the agency considers making changes to the equal-credit act.

Few dispute that Chopra will take a keen interest in fintech's use of AI and machine learning. He spent three years as a commissioner at the FTC and wrote extensively about technology companies. He is expected to direct the CFPB’s staff to analyze black-box algorithms that many lenders say promote inclusivity but that some consumer advocates argue contain racial bias.

“Chopra is just totally uniquely positioned to be the dominant regulator in the fintech space given the CFPB’s authority over nonbanks,” said Rodman.

To be clear, no one expects that a focus on small-business lending and alternative underwriting data means that the agency will be turning a blind eye to housing-related fair-lending violations.

CFPB examiners are looking closely at whether mortgage lenders have engaged in marketing discrimination that would discourage certain borrowers from applying for a home loan.

The bureau provided some insights into its views on racial equity issues in a 55-page report last month that analyzed consumer complaints based on race and income.

“Certain parts of the report show the CFPB is viewing [complaint] data primarily as evidence of inequity in access to the mortgage markets to access this low–interest rate environment,” said Richard Horn, co-managing partner at the law firm Garris Horn and a former CFPB senior counsel and special advisor.

In analyzing complaints related to consumer credit, the CFPB found that demographic characteristics tended to correspond with the types of complaints that a consumer submitted to the CFPB. For example white borrowers complained more about the loan origination process, suggesting they had greater access to credit, while Black consumers complained more about credit reporting.

"These differences serve as one more reminder of the starkness of the racial wealth divide in the United States and its relationship to credit access, especially housing finance," the CFPB said in the report.

The bureau is expected to act quickly on issues related to redlining and other discriminatory practices because of the dearth of enforcement actions during the Trump administration.

“The CFPB staff has been working hard on a lot of fronts from rulemaking to supervision and enforcement but they are waiting for the new director to come in and push the button for the green light to proceed,” Truong said.