The Bureau’s Pursuit of Fair Lending

By now it is a known fact that one of the most important features of an examination conducted by the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) is a rigorous review of fair lending compliance. So, given its importance, it behooves us to learn about what the CFPB has found out about fair lending and what actions are needed to ensure its compliance. In this article, I provide an analysis of the CFPB’s most recent findings in the mortgage space as well as practical actions to be taken that help to build a vibrant fair lending initiative, gleaned from both the Bureau’s own issuances and actions, as well as my firm’s experience in assisting institutions with their CFPB fair lending examinations.

On April 30, 2014, the Bureau issued an Annual Report, entitled “Fair lending Report of the Consumer Financial Protection Bureau” (“Report”).[i] Richard Cordray, Director of the CFPB, stated in the Report’s preamble:

“Far too many consumers still must navigate a financial marketplace laden with deceptive marketing, debt traps, dead ends, and discrimination. At the Consumer Bureau, we are fierce advocates for a consumer financial marketplace that allows all Americans to pursue a path to greater opportunity. To that end, we are working to remove the unnecessary obstacles too many Americans face in the consumer financial marketplace. This includes ferreting out discrimination in credit markets, including the markets for home mortgages and auto lending.”[ii]

The Report generally covers the period from July 21, 2012 through December 31, 2013. In addition, there is Interagency Reporting on ECOA and HMDA contained therein, which conveys information on the Bureau’s and other administrative agencies’ functions under ECOA and HMDA, as required by those statutes, for the period of January 1, 2012 to December 31, 2013.

Patrice Alexander Ficklin, the Bureau’s Director of Fair Lending and Equal Opportunity, offered this overview of the Report:

“In this report we describe our steady focus on ensuring that consumers have fair, equitable, and nondiscriminatory access to credit by using all of the tools at our disposal – including research, supervision, enforcement, consumer education and outreach, rulemaking, and interagency engagement.”[iii]

The Bureau issued the Report to Congress “in fulfillment of its statutory obligation and continued commitment to accountability and transparency.”[iv] In this regard, the Bureau is relying on its claimed efforts to fulfill its fair lending monitoring mandate, and provides additional reporting required by the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA).[v]

Dodd-Frank established the Office of Fair Lending and Equal Opportunity (the “Office of Fair Lending”) within the CFPB, and charged it with “providing oversight and enforcement of Federal laws intended to ensure the fair, equitable, and nondiscriminatory access to credit for both individuals and communities that are enforced by the Bureau,” including ECOA and HMDA.[vi] The Office of Fair Lending is required to coordinate “fair lending efforts of the Bureau with other Federal agencies and State regulators, as appropriate, to promote consistent, efficient, and effective enforcement of federal fair lending laws,” and works “with private industry, fair lending, civil rights, consumer and community advocates on the promotion of fair lending compliance and education.”[vii]

Since the Bureau’s last report to Congress in December 2012, the Bureau has built fair lending tools and materials and engaged in public dialogue in order to educate, inform, and learn from consumers, advocates, and industry. It introduced a Home Mortgage Disclosure Act Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. Additionally, the Bureau has published a bulletin on lending discrimination to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets.[viii] 

REPORT’S CONCLUSIONS 

We can derive certain salient observations about the Report’s findings.

In the first place, the Bureau has noted increasing efficiencies in fair lending activity. Thus, they have “created, refined, and implemented a risk-based fair lending prioritization process” to ensure that their supervisory procedures focus on the “areas presenting the greatest fair lending risk to consumers.” The approach, dubbed “risk-based prioritization” by the Bureau, uses the collection of both quantitative and qualitative data to assess fair lending risk to consumers as well as assessments of risk in order to prioritize enforcement actions.[ix]

Importantly, with respect to providing guidance on its examinations, the Bureau publicly released information about the three methods its examiners use in fair lending supervisory reviews: (1) ECOA Baseline Reviews, (2) ECOA Targeted Reviews, and (3) HMDA Data Integrity Reviews. In the period subject to the Report, the CFPB has completed dozens of examinations on ECOA and HMDA compliance.[x] Through these examinations the Bureau detected some violations of ECOA and HMDA. However, it also found that many lenders have instituted and maintained strong fair lending Compliance Management Systems (“CMS”) and had no violations of ECOA or HMDA. With respect to self-assessments, the Bureau has issued guidance describing how to conduct them, so as to be in compliance with ECOA and HMDA. Guidance has been provided through the Bureau’s Supervisory Highlights and Bulletins discussing fair lending topics.

The Bureau has used the collection of data to analyze its supervision and enforcement priorities and determine two key priorities: mortgage lending and auto finance. With respect to mortgage lending, the CFPB conducted fair lending supervisory reviews of a number of mortgage lenders, finding that many lenders have strong fair lending compliance management systems and no violations of ECOA or HMDA. However, the Bureau did allege some instances of fair lending non-compliance. Consequently, it took enforcement action against two mortgage lenders for violating HMDA, which resulted in assessments of civil monetary penalties and other relief. It is important to note that, in addition to jointly investigating certain matters with the United States Department of Justice (DOJ), the CFPB also made several referrals to the Department of Justice for violations of ECOA, one of which actually resulted in a recent enforcement action.

The interagency coordination and collaboration is a critical feature of the Bureau’s pursuit of violations. The CFPB continues to coordinate with the Federal Financial Institutions Examination Council (FFIEC) agencies, as well as the DOJ, the Federal Trade Commission (FTC), and the Department of Housing and Urban Development (HUD), in enforcing fair lending statutes. In fact, in 2012, the CFPB formalized its fair lending enforcement relationship with the DOJ via a Memorandum of Understanding (MOU).[xi] 

Complaints and Whistleblowers and Priorities

The CFPB uses input from a variety of external and internal stakeholders to inform its fair lending prioritization process. Thus, it considers fair lending complaints received by its Office of Consumer Response or brought to the Office of Fair Lending’s attention by advocacy groups, whistleblowers, and other government agencies (at the local, state, and federal levels). As part of the prioritization process, the Office of Fair Lending also considers public and private litigation.

The Enforcement Powers of the Consumer Financial Protection Bureau

For several months, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) has implemented a spate of enforcement actions against banks and nonbanks. My interest in this article is neither to re-litigate those cases nor single out any particular financial institution for further scrutiny.* Sometimes we must learn our lessons at somebody else’s expense, rather than to castigate another for unseemly conduct. None of us, however, is absolved of the responsibilities, the violations of which could lead to enforcement actions against us or the financial institution where we are employed.

It is important, therefore, to have some sense of what is meant by the term “enforcement,” especially with respect to the CFPB’s authorities. The CFPB received a host of enumerated laws and related authorities on July 21, 2011[i], and, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), a concomitant set of defined rules were established[ii] that gave the Bureau numerous enforcement powers, including the powers to conduct investigations and implement enforcement actions to enforce federal consumer financial law.[iii]

For instance, Section 1052 of the Dodd-Frank authorizes the CFPB to engage in joint, interagency investigations and requests for information, including matters relating to fair lending. Though the statute specifically provides that, “where appropriate,” the Bureau may conduct “joint investigations” with the Secretary of Housing and Urban Development, the Attorney General of the United States, or both, it also sets forth lengthy provisions governing subpoena powers and civil investigative demands.

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IN THIS ARTICLE

Hearings and Adjudications

Scope of Legal Remedies

Blowing the Whistle on Violations

Policy Statement and Whistleblower Protection

Locking Horns with the Department of Labor

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Hearings and Adjudications

On November 7, 2011, the Bureau issued CFPB Bulletin 2011-04 (entitled “Enforcement”),[iv] the first in a series of bulletins relating to policies and priorities of the Bureau’s Office of Enforcement. The Bulletin announced that before the CFPB commences an enforcement proceeding, it may (or may not) give the subject of the proceeding notice of the nature of the potential violations and may (or may not) offer the subject the opportunity to submit a written statement in response. The Bulletin also gave specific instructions regarding the submission requirements of the written statement, such as the paper size, spacing, font size, and length, while also mandating that the response had to be received by the CFPB by no more than 14 calendar days after the notice.[v]

Almost a year after the CFPB received its authorities, it adopted rules, on June 29, 2012, regarding the procedures it expected to follow when investigating whether a “person” (a legal term for an individual or entity) is or has been engaged in conduct that would constitute a violation of any provision of federal consumer financial law.[vi]

Indeed, Dodd-Frank authorizes[vii] the Bureau to conduct hearings and adjudication proceedings to ensure or enforce compliance with the following applicable items:

• Title X, which established the Consumer Financial Protection Bureau as an independent agency within the Board of Governors of the Federal Reserve System, including any rules prescribed by the CFPB under Title X; and
• “… any other Federal law that the Bureau is authorized to enforce, including an enumerated consumer law, and any regulations or order prescribed thereunder, unless such Federal law specifically limits the Bureau from conducting a hearing or adjudication proceeding and only to the extent of such limitation.”

Furthermore, Section 1053 of Dodd-Frank sets forth the rules for Cease-and-Desist proceedings and enforcement orders.

Statutorily, Dodd-Frank authorizes the CFPB to apply to the United States district court within the jurisdiction of which the principal office or place of business of the person is located, for the purposes of enforcing any effective bulletin or notice, outstanding notice, or order.

Thus it was that, soon after the Bureau announced its rules for investigating violations, in July 2012 the CFPB announced its first enforcement action. That action consisted of a consent order in which Capital One agreed to refund $140 million to 2 million customers and pay a $25 million penalty. The enforcement was the consequence of alleged deceptive marketing tactics used by Capital One’s vendors to coax consumers into paying for add-on products when they activated their credit cards.[viii]

Dodd-Frank authorizes the CFPB to commence a civil action against any person who violates a federal consumer financial law and to impose a civil penalty or to seek all appropriate legal and equitable relief including a permanent or temporary injunction.

When commencing a civil action, the Bureau must notify the Attorney General and, with respect to a civil action against an insured depository institution or insured credit union, the appropriate prudential regulator. Except as otherwise permitted by law or equity, no action may be brought under Title X more than three years after the date of discovery of the violation.

Indeed, the CFPB published an interim rule regarding its awarding of attorney fees and other litigation expenses in certain situations, as required by the Equal Access to Justice Act.[ix]

Whistleblowers and Bounty Hunters

Americans have often had an ambivalent view of whistleblowers. When we feel that the whistleblowing serves some righteous cause, the whistleblower's actions are worthy of a medal; but when the whistleblower's cause is considered to mask self-aggrandizement, then we often contend that some jail time might be a more suitable reward, whatever the cause. Still, one person's justification for such actions may be castigated by another person as an act of perfidy.

In a rather morally twisted way, recent law has combined the act of whistleblowing with the remuneration of bounty hunting, the latter being yet another concerning happenstance of American ambivalence.

Let's call this new ethical imperative the "Dope for Dough" compact.

In this article:

• A Snitch In Time Saves Crime
• If You See Something, Say Something
• Welcome to the Office of the Whistleblower
• Bounty Hunter
• Tips, Complaints and Referrals
• Anonymity More-or-Less
• Preventing Retaliation More-or-Less
• First Do No Harm

A Snitch In Time Saves Crime

Being a snitch is not exactly the kind of job position somebody must apply for, even in these days of high unemployment. It's not a career opportunity. A snitch doesn't want to be a snitch, hates snitching, and would rather not have to snitch at all. Being a snitch does not bestow a badge of honor! There are no annual conferences for snitchers. A snitch is not born a snitch; something has to happen to make a snitch snitch.

Often, the stakes for snitching are very high. Being a snitch means subjecting oneself to potential ostracism, being fired, not being hired, jail time, and even community time (yes, courts have held that "community service" may be a proxy for prison time). Snitchers know that whenever people pass them by, there will be fingers pointed at them and breathless whispers behind their backs about the supposed damage done by, or the great good achieved through, their snitching. Snitching has a wake all its own and the snitcher can never get out of it, whatsoever the tattletale tattled.

The list of snitch martyrdom is long and, depending on the results and society's comfort zone, contains patriots and traitors, saints and the damned, reformists and reactionaries, the sempiternal loyalists and the double-crossing turncoat. Even if the weaseling betrayer squeals the unvarnished truth, the very act of making manifest the heretofore hidden may bring with it many dangers impinging on the tipster's physical, let alone social, survival.

If You See Something, Say Something!

We constantly hear, "if you see something, say something." Implied in that statement is the moral judgment that we do know when something is wrong and when something is right, and, knowing that difference, when we know something wrong is happening, we should share such knowledge with somebody else. The phrase does not say, "if you see something, say something, and if you do we'll pay you for the information." It does not say, "if you see something, say something, but if you do you will put yourself and perhaps all of your loved ones at personal risk." And it does not say, "if you see something, say something, but if you do you may go to jail or you may not." Finally, it does not say, "if you see something, say something, though if you do we will ignore what you have to say and nobody will ever know something wrong happened."

The instinct for self-preservation is strong. Especially strong in a stoolie! This is obviously why a recent study shows that 78 percent of Americans said they would report something wrong only if they could be anonymous informants, be assured of evading retaliation, and nevertheless get a reward for information, whether such information was pilfered, pinched, purloined, or professed.

Pity the poor snitch! So misunderstood, often the butt of ridicule, and only occasionally appreciated for the grumbling sacrifice of life and liberty. But now a new era of gratitude, tribute, and prestige has begun for the deep throated canary that yearns to sing.

Welcome to the Office of the Whistleblower

Henceforth, we will need to replace the term snitch with a new title, the "whistleblower," and appoint an overseer to protect the whistleblower's rights, prevent retaliation, and offer remuneration for blowing the whistle and assisting with any investigation or judicial or administrative action that follows from the information thereby obtained.

Section 924(d) of the Dodd-Frank Act (Dodd-Frank) directs the Security and Exchange Commission (Commission) to establish a separate office within the Commission to administer and to enforce the Section 21F provisions of the Securities Exchange Act of 1934 (Exchange Act). On February 18, 2011, the Commission appointed an overseer or Chief, Sean X. McKessy, to head the newly-created Office of the Whistleblower in the Division of Enforcement (Whistleblower's Office). Chief McKessy is looking for a Deputy Chief, and there are several attorneys among the staff.

The ostensible purpose of the Whistleblower's Office is to provide assistance to a whistleblower who knows of possible securities law violations, such as identifying possible fraud and other violations, much earlier than might otherwise have been possible. The result, presumably, will be to minimize the harm to investors, preserve confidence in capital markets, and hold accountable those responsible for unlawful conduct.

Bounty Hunter

For remunerating the whistleblower, the Commission is authorized by Congress to provide monetary awards to eligible individuals who come forward with "high-quality original information" that leads to a Commission enforcement action in which over $1,000,000 in sanctions is ordered. The range for awards is between 10% and 30% of the monetary sanctions collected (which I will term the Bounty Fee).

This Bounty Fee of 10% to 30% is particularly robust, compared to the usual 10% (or less) of bail collected these days by bounty hunters. Of course, the whistleblower's Bounty Fee is not quite the same as the fee paid to a bounty hunter for capturing a fugitive outlaw. Bounty hunters are usually employed by bail bondsmen. But there is, shall we say, a resemblance.