CFPB Summer 2021 Supervisory Highlights: Fair Lending
Last week, we blogged about the CFPB’s Summer edition of the Supervisory Highlights and focused on the Regulation E errors found by CFPB examiners. Today’s blog will turn to the lending side of exams and outline some of the fair lending violations identified. As a reminder, the bureau supervises financial institutions for compliance with the Equal Credit Opportunity Act (ECOA) and Reg B, as well as the Home Mortgage Disclosure Act (HMDA) and Reg C. In this recent edition of the supervisory highlights, the CFPB noted numerous violations of both acts and noted lack of oversight, outdated policies and procedures, and audit deficiencies as contributing factors.
The bureau focused in on errors found in 2018 and 2019 HMDA data, explaining that there were widespread errors and inaccuracies in many institutions’ 2018 data, and fewer errors found in the 2019 data. One explanation for this is that multiple HMDA data fields were added to the regulation in 2015, and were applicable to 2018 submissions. Therefore, the reviews of HMDA data for 2018 and 2019 were the first reviews in which the CFPB could assess the accuracy of reporting for the new data points. Due to the number of errors found in 2018 data, many institutions were directed to correct their LARs.
Some HMDA errors occurred due to failed data collection and data transfer practices. Sometimes credit unions and other financial institutions use data collecting software or services to ease the task of compiling HMDA-reportable information about members. However, these systems are not foolproof and may lead to errors in data transmittal that leads to errors in HMDA filings.
Additionally, CFPB examiners found that many financial institutions failed to comply with HMDA requirements due to inadequate monitoring and audits. In order to avoid violations, credit unions may need to ensure appropriate monitoring systems are in place to catch and correct errors before they become widespread.
Further, many of the widespread and recurring errors at certain institutions occurred because of misunderstandings of requirements. For example, one institution routinely reported some fields as “not applicable” when in fact the appropriate amount to report in the field was “zero.” Overall, the fields with the highest number of identified errors across several institutions were the “Initially Payable to Your Institution” field and the “Debt-to-Income Ratio” field. In order to avoid errors and violations of HMDA and Reg C, credit unions may want to train staff responsible for data collection regularly enough to determine they understand each HMDA data field. Providing staff with the FFIEC’s Guide to Getting It Right may also be helpful.
In its report, the CFPB did not express a widespread redlining issue among financial institutions, but used this section to describe the violations of ECOA and Reg B of one unnamed institution. The institution at issue was found to have offered far fewer loans and taken far fewer loan applications from consumers in minority neighborhoods when compared to the lending activity of consumers in white neighborhoods. The bureau also found that this lender tailored advertisements and outward facing communications in a way that encouraged prospective white applicants and discouraged prospective minority applicants. Considering these and other circumstances, examiners determined there was a violation of nondiscrimination laws in the form of redlining, and prescribed remedial and corrective action.
Although this analysis was based on the particular practices of one institution, credit unions can use this as guidance in identifying practices that may lead or contribute to fair lending concerns. For example, one of the concerning factors in this situation seemed to be the lender’s targeted marketing strategies, which was found to discourage some applicants on a prohibited basis. As discussed in our blog post Targeted Marketing and Fair Lending Concerns, credit unions can maintain effective marketing plans while ensuring that all members and audiences are treated equally and offered equal opportunities to receive financial products and services. It is important to conduct and document an analysis of fair lending risks of a marketing strategy in order to reduce the chance of unintentional discrimination.
More details on the CFPB’s findings and the full Summer Supervisory Highlights can be found here.
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