Banks, consumers groups to CFPB: Don’t rush overhaul of redlining law

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Banks are joining consumer groups to urge the Consumer Financial Protection Bureau not to rush potential changes to the Equal Credit Opportunity Act.

The CFPB asked the public last month to weigh in on possible ways to improve how the agency implements the 1974 law, which bars discrimination in any aspect of a credit transaction, through Regulation B.

But a coalition including banking trade groups, consumer advocates and civil rights groups sent a letter to CFPB Director Kathy Kraninger on Monday calling for more time to respond. The bureau gave commenters an Oct. 2 deadline, which is two months after the agency's notice was published in the Federal Register.

"We respectfully submit that a 60-day comment period does not provide sufficient time to meaningfully address the ten important issue areas presented in the" request for input, wrote the groups, which include the American Bankers Association, Bank Policy Institute, Consumer Bankers Association and the Independent Community Bankers of America, among others.

"Comment on each one of these issues is vital to achieving a fairer and more inclusive marketplace," the letter continued. "In addition, the COVID-19 emergency and shutdowns make the 60-day comment period even more challenging for all of us. For these reasons, developing thoughtful comments on each issue to help the Bureau achieve those goals will take more time than has been allotted."

Advocacy groups have been particularly up in arms about the duration of the public comment period at a time when the nation is focused on the pandemic and a national debate about racial injustice.

“This civil rights statute is too important to address ... in a time of deep distress, with COVID-19 and the country discussing systemic racism,” said Odette Williamson, an attorney at the National Consumer Law Center, which signed the letter. "We are very concerned about the scope of the [request for information] and that there is not enough time for a principled and meaningful response."

The bureau issued the RFI about reworking the equal-credit act on July 28, a day before Kraninger testified before Congress. The request also came three months before the presidential election that could result in Kraninger leaving the bureau if the presumptive Democratic nominee, Joe Biden, wins in November.

ECOA experts say each of the topics in the bureau's request for information would be worthy of its own separate inquiry. Topping the list is whether compliance with the act should be overhauled due to two separate Supreme Court decisions, one on gender identity discrimination and the other on “disparate impact,” in which borrowers can allege discrimination even if a lender did not show discriminatory intent.

But the coalition's letter, while expressing support for an effort to change or clarify Reg B, noted that there is "no statutory deadline or other mandate" requiring a 60-day comment period.

"The Bureau has not indicated that it has particular regulatory revisions or clarifications in mind that would warrant the shorter timeframe provided in the current 60-day comment period," the groups said. "We believe that consideration of how Regulation B might be changed or clarified to ensure more equity and fairness should be done through a process that affords a greater opportunity for thoughtful public participation."

Even though the agency's notice suggests the bureau may ease lenders' regulatory burden, bankers are also concerned with how the CFPB will develop small-business lending regulation in a separate rulemaking that resembles requirements for mortgage lenders under the Home Mortgage Disclosure Act, some observers said.

Small-business lending comes up numerous times in the agency's request for comment. For example, one question deals with how lenders use artificial intelligence and machine learning in their underwriting. The bureau also asked for ideas on how its implementation of the ECOA "might ... support efforts to meet the credit needs of small businesses, particularly those that are minority-owned and women-owned?"

Some observers said the bureau may be trying to move quickly because the upcoming presidential election puts the agency's leadership on shaky ground.

“There isn’t enough time to comment,” said Rick Fischer, a senior partner at Morrison & Foerster, who represents banks and other financial institutions. “What is happening is the CFPB now recognizes that their time is limited and they are trying to push things along."

Fischer also noted that the ECOA is technically related to a rulemaking the agency still must issue under the Dodd-Frank Act requiring institutions to submit data on their small-business lending.

"There are a lot of things in the context of ECOA, particularly the small business data collection, that is so complicated," he said. "They are asking for comments on lots of issues and it will be very challenging for the CFPB to cover them all.”

The CFPB’s request also asks for comment on existing rules to encourage lenders to use "affirmative advertising" to cater to disadvantaged groups; the extent to which federal ECOA rules preempt state laws; how to incentivize lender outreach to consumers with limited English proficiency; and whether the agency should provide more clarity "regarding when all or part of the applicant’s income derives from any public assistance program."

The consumer bureau's RFI comes at a time when fair housing advocates and lenders are already scrambling to comment on the CFPB’s "qualified mortgage" proposal and the Federal Housing Finance Agency’s proposed capital rule for Fannie Mae and Freddie Mac, said Lisa Rice, president and CEO of the National Fair Housing Alliance. The fair housing alliance also signed the letter.

“This is a death by a thousand comments,” said Rice. “If they want consumers to weigh in they have to be cognizant that we are all small groups, and even the lenders do not have huge public policy shops, so they have to be a little bit more flexible.”

“Now is not the time since we are facing a triple pandemic with a health crisis, economic disparities and ... [the focus on] systemic racism,” Rice said.

During her last hearing on Capitol Hill, Kraninger was harshly criticized by Democratic lawmakers for not doing more to prevent redlining and discrimination in lending. Under the Trump administration, the CFPB has issued just two fair-lending enforcement actions in three years.

Some experts suggest that the bureau could provide guidance on its implementation of ECOA related to any one of the topics covered in the RFI, and the agency will zero in on a focus depending on the comments it receives. Still, such guidance could be reversed if Biden wins in November. Under a recent Supreme Court decision, a president can fire a sitting CFPB director without cause.

“The answers and guidance we ultimately receive will largely depend on what administration is in power in January,” said Richard Gottlieb, a partner at Manatt.

Still, Gottlieb said, the RFI discusses issues where there is common ground and added guidance could help financial institutions get a handle on their compliance. For example, a clearer policy on catering to borrowers with limited English proficiency is necessary because most lenders typically only provide a limited set of loan documents in English and possibly Spanish.

"For the longest time we’ve been advising clients to be careful about lending to persons with limited English proficiency," Gottlieb said. "Generating some safe harbors would be step in the right direction."

But there is likely to be more pushback over the CFPB's considering ECOA changes given Democratic lawmakers' criticism of Kraninger's record on fair-lending issues.

"Your job, Director Kraninger, is to look out for everyone else, the workers and the families without lobbyists who don't have wealth and connections to throw around," said Sen. Sherrod Brown of Ohio, the top Democrat on the Senate Banking Committee at a hearing on July 29. "That's why we created this agency a decade ago," Brown said.

Some experts said the consumer bureau had planned on holding a symposium on implementing ECOA but was unable to do so because of the coronavirus pandemic so the bureau put out the request for information instead.

"The information that is submitted will help us enforce the Equal Credit Opportunity Act, or ECOA,” Kraninger told lawmakers at the same hearing. “The CFPB is taking steps to help create real and sustainable changes in our financial system so that African-Americans and other minorities have equal opportunities to build wealth and close the economic divide. Among the topics the public can comment on are how to better protect consumers with limited English proficiency as well as applicants who derive income from many public assistance programs."

Meanwhile, consumer advocates and industry attorney see a potentially huge issue in the CFPB suggesting possible changes to "adverse action" notice requirements. ECOA requires lenders to notify the borrower of the reason the creditor took an adverse action on an application.

Observers said the agency needs to thoughtfully address such requirements as financial institutions increasingly use AI in determining credit decisions.

"How are they going to disclose an adverse action and why someone was denied credit if the company doesn't understand how the algorithm made the decision and how it is used in the credit context?" Williamson said.

Fischer agreed, noting that bankers are concerned about increased litigation.

“Adverse actions in the context of scoring systems is an enormous issue," he said. "When it's AI-machine learning, you can't just say it's a black box, you have to say what are the principal reasons" for a borrower being denied credit.

Fischer suggested the agency may need to narrow the focus of any ECOA changes after it receives comments.

"What they could do is issue guidance rather than full regulations, but right now they have thrown a really broad net out and they're going to have to pull the net in before they see what they have for dinner," Fischer said. "Once they see what they've collected, then they can decide."

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