Fair Lending Activity: Calm on the Surface, Churning Below

Editor's note: Authored by Michelle Rogers, Josh Kotin and Margaux Curie, this article was originally published in Law360.

"Fairness" in financial services has been the watchword of the Biden administration's consumer financial services policy from day one, with the administration making a number of big pronouncements to combat redlining,[1] appraisal bias,[2] digital marketing,[3] and bias in the deployment of artificial intelligence and machine learning tools throughout the underwriting process.[4]

The Biden-era Consumer Financial Protection Bureau has been outspoken on these and other fair lending topics but in 2022 brought only one public fair lending enforcement action.

On June 29, the CFPB issued its annual fair lending report to Congress, confirming that, despite the paucity of public fair lending enforcement actions in 2022, the CFPB and prudential banking agencies are engaged in significant nonpublic oversight, examination and enforcement activities.

These oversight activities extend to virtually all consumer lending products, as well as small-business loans.

And, while the CFPB is focused on bias with respect to advanced and emerging technologies, the report details a host of regulatory activities around technical noncompliance with fair lending protections related to not only race and ethnicity — areas of traditional concern — but also with respect to age discrimination and public assistance discrimination.

The bureau is keeping a watchful eye for discrimination risks associated with the deployment of new technologies.

In its annual report, the CFPB describes how it and other agencies are focused on understanding and monitoring risks of discrimination associated with new or advanced technologies.

The CFPB indicates in the report that it is already using its Equal Credit Opportunity Act and unfair, deceptive, or abusive acts or practices supervisory authority to look at bias in automated systems and models, including the targeting of vulnerable populations.

More broadly, in the bureau's discussion about the future of fair lending, the CFPB flags discrimination risks associated with sophisticated digital marketing, fraud screens and underwriting models reliant on artificial intelligence and machine learning, and chatbots and behavioral analytics that affect post-origination consumer interactions.

To that end, the bureau states it is "increasing its expertise in data science and analytics to ensure that we can identify fair lending violations ... and hold creditors and service providers accountable for fully complying with fair lending and other federal consumer financial laws."

Using somewhat charged language, the CFPB also highlights in its report concerns with "big tech platforms," which collect data that "are now fueling highly complex, black box algorithms."

Making good on these concerns, in its July 26 supervisory highlights, the bureau notes it has begun flexing its authority to supervise nonbank entities that the CFPB has "reasonable cause to determine" pose risks to consumers, and that several entities not ordinarily subject to CFPB supervisory authority have voluntarily consented to be examined.

Scrutiny of the deployment of emerging technologies has clearly already begun, and can be expected to continue, particularly given all the public excitement and coverage of developments in artificial intelligence technology.

The lack of CFPB fair lending enforcement actions in 2022 is by no means an indication of lax enforcement and stringent oversight.

The CFPB brought only one fair lending enforcement action in 2022 — a joint settlement with Trident Mortgage and the U.S. Department of Justice and attorneys general over claims of redlining in the Philadelphia region.

However, the report reflects that the CFPB devoted significant resources to fair lending oversight in the past year, and it is engaging in substantial nonpublic examinations and investigations of lending activity across a wide range of products.

Specifically, the CFPB indicates it is conducting active fair lending investigations in product markets including student lending, payday lending, credit cards and mortgage lending for evidence of discriminatory UDAAP and/or ECOA violations. In the mortgage space, the CFPB notes it is looking at redlining, reverse redlining, and pricing exception and home valuation practices.

Picking up on themes highlighted in its annual report, the CFPB also disclosed in its most recent supervisory highlights a host of fair lending issues identified in examinations.

In the mortgage space, the bureau for the second time in its supervisory highlights describes the risks associated with the use of pricing exceptions in mortgage lending.

The bureau noted that examiners found disparities with respect to the number of pricing exceptions for competitive reasons granted to protected class borrowers as compared to nonprotected class borrowers.

The bureau also criticized institutions for, among other things, maintaining inadequate policies and procedures governing pricing exceptions, failing to document the justification for exceptions, and not taking corrective actions when risks were identified.

The bureau also describes in its supervisory highlights concerns about certain attributes used in underwriting for a variety of financial products and services.

In particular, the bureau notes that the use of attributes related to a consumer's "prior contact with the criminal justice system" is likely to have a disparate impact based on race and national origin, and its use therefore creates a heightened risk of fair lending violations.

The bureau also describes underwriting policies and concern that inadequately credit, or account for, the receipt of public assistance income.

When it comes to fair lending oversight and enforcement, the CFPB is by no means the only game in town.

From a federal perspective, the annual report states that the bureau, the Federal Deposit Insurance Corp., the Federal Reserve Board and the National Credit Union Administration collectively referred 23 potential fair lending violations to the Justice Department in 2022, with the FDIC accounting for 12, the CFPB and the NCUA accounting for five each, and the FRB accounting for one.

Those referrals covered mortgage lending, consumer lending, auto pricing and credit cards.

This referral activity shows that, while agencies have concerns about more traditional areas of focus — redlining and discrimination on the basis of race and ethnicity in underwriting and pricing practices — there is also a significant focus on compliance with other ECOA protections.

In particular, the agencies are looking at improper consideration of consumer marital status, age, public assistance income, familial status and a consumer's exercise of rights under the Consumer Credit Protection Act.

Outside the CFPB and federal banking regulators, the Federal Trade Commission and certain state agencies have shown similar interest in enforcing fair lending laws — particularly in the auto lending space.

For instance, at the end of 2022, the FTC settled with the auto dealership Passport Automotive Group alleging that it unfairly discriminated against Black and Latino customers by charging higher interest rate markups untethered to consumer creditworthiness, and more often charging them so-called junk fees.[5]

The New York Department of Financial Services also settled at the end of 2022 a similar case with Rhinebeck Bank pertaining to discrimination in pricing indirect auto loans.[6] The Massachusetts Attorney General also charged two auto dealerships over alleged discriminatory pricing of add-on products, reaching a settlement with Hometown Auto Framingham in January.[7]

Fair lending hygiene remains important even if we can't point to new public settlements.

Whether you're using an abacus to calculate borrower income or letting machine learning models do the thinking for you, fair lending must remain top of mind. As the bureau's 2023 fair lending report makes clear, regulators are interested in new and old lending practices, and are interested in fair lending risks across a wide array of products.

To that end, we expect regulators to continue deploying novel approaches for assessing fair lending risks, particularly outside the mortgage space where there is an absence of demographic information regarding the consumer.

This is likely to include monitoring institutional decision-making practices around the deployment of advanced technologies, such as artificial intelligence and machine learning models.

With respect to advertising, regulators are likely to continue looking at dark patterns and distribution practices, which the bureau even weighed in via an amicus brief in pending ECOA-related litigation over practices at for-profit nursing school Health Career Institute LLC.[8]

Finally, regulators have always analyzed underwriting guidelines and customer complaints, and will continue to do so to identify new practices that may raise fair lending concerns.

[1] https://www.justice.gov/opa/pr/justice-department-announces-new-initiative-combat-redlining.

[2] https://pave.hud.gov/.

[3] https://files.consumerfinance.gov/f/documents/cfpb_time-or-space_interpretive-rule_signed_2022-08.pdf.

[4] https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_joint-statement-enforcement-against-discrimination-bias-automated-systems_2023-04.pdf.

[5]https://www.ftc.gov/system/files/ftc_gov/pdf/Complaint%20Passport%20Auto%20Group%2C%20Inc.%2C%20et%20al..pdf.

[6] https://www.dfs.ny.gov/system/files/documents/2022/10/ea20221005_co_rhinebeck.pdf.

[7] https://www.mass.gov/doc/hometown-auto-framingham-aod/download.

[8] https://s3.amazonaws.com/files.consumerfinance.gov/f/documents/cfpb_roberson-v-health-career-institute-llc_2023-04.pdf.

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