Fair lending continues to be a regulatory hot button

The Biden Administration has committed to increased oversight and enforcement of several fair lending regulations, and the Consumer Financial Protection Bureau (CFPB) has recently recruited attorneys to assist with the aggressive stance. All financial institutions should expect additional scrutiny as the CFPB focuses on artificial intelligence (AI), machine learning (ML), and other new technologies used for underwriting, pricing, collections, and other purposes.

Here’s an overview of what’s happening:

Equal Credit Opportunity Act (ECOA) - Following an executive order signed by President Biden, expect increased enforcement of ECOA and Reg B, which disallows creditors from making any statement that would discourage applicants on a prohibited basis from making or pursuing a credit application. The CFPB recently expanded ECOA protections to prohibit discrimination based on sexual orientation or gender (LGBTQ+ Americans).

Fair and Accurate Credit Transactions Act (FACTA) - Fair lending practices associated with the three primary credit reporting agencies (CRAs) – Equifax, TransUnion, and Experian – are also under review. Typical loan repayment screening involves review of the applicant’s credit score, according to existing regulations that direct how a lender communicates with the credit bureaus. Some argue FACTA prevents some consumers from owning a home due to credit reporting errors and biased methods for assigning credit scores that negatively impact minority groups. A public CRA housed within the CFPB which would compete with and potentially replace the three major credit bureaus is under consideration.

Home Mortgage Disclosure Act (HMDA) - As directed by the Dodd-Frank Act, the CFPB must assess the October 2015 amendments to Reg C, which require financial institutions to collect and report application data for covered loans they receive, originate, and purchase each calendar year. Examiners have identified violations due to inaccurate data on 2018 HMDA loan application registers (LARs) thanks to transaction testing, which compares a sample of the institution’s HMDA LAR to loan file source documents. If a LAR with more than 500 entries has more than four errors in a data field, then the institution must correct and resubmit its HMDA LARs. While financial institutions may be getting better at recording data – the regulations affected 2018 reporting and examiners have not found widespread errors on 2019 LARs – financial institution leadership and board members should monitor this issue closely because the root causes cited for the HMDA violations were due to insufficient board and management oversight, policies and procedures, training, monitoring, and audit and TPR oversight.

For now, the CFPB announced it is no longer pursuing two other proposed HMDA rulemakings – one regarding the data points lenders are required to report and another related to the public disclosure of HMDA data.

Still, it’s clear that fair lending practices involve reviewing much more than credit scores and traditional guidelines. The renewed focus impacts not only financial institutions subject to CFPB and other banking regulations, but also fintechs since the Biden administration and CFPB have expressed their intention to explore oversight of these organizations, too.

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