fair lending laws and udaap new developments, compliance
TRANSCRIPT
Fair Lending Laws and UDAAP
New Developments, Compliance
Strategies, and Risk Management
Philip R. Stein, Partner
305-350-7220
Bilzin Sumberg Baena Price & Axelrod LLP
3903520.V1
Overview of Program
Focus Areas:
The Evolving Definitions of "Fair Lending"
and UDAAP
Impact of the CFPB on These Areas
Compliance Strategies
Recent Litigation Developments
What is "Fair Lending"?
Dodd-Frank definition:
"Fair lending" means "fair, equitable, and
nondiscriminatory access to credit for
consumers."
Fair Lending - Governing Laws
Two primary federal laws govern fair lending
practices:
Equal Credit Opportunity Act ("ECOA") and
Regulation B (CFPB) (15 USC §1691; 12 CFR
Part 1002):
ECOA, enacted in 1974, prohibits
discrimination based on race, color, religion,
national origin, sex, marital status, age,
source of income, or whether person
exercises rights granted under Consumer
Credit Protection Act for any aspect of
consumer or business credit transaction.
Fair Lending - Governing Laws
Two primary federal laws govern fair lending
practices:
Fair Housing Act ("FHA") and HUD Regulations
(42 USC §3605; 24 CFR Part 100):
Part of Civil Rights Act of 1968; unlawful for
any lender to discriminate in "residential real
estate-related transaction" against any
person because of his or her race, color,
religion, national origin, sex, familial status,
or handicap.
State or local laws may include additional
prohibited bases, such as sexual orientation.
Scope of Fair Lending Laws
Fair lending laws and regulations apply to:
All credit products and services for both
consumer and business purposes; and
Entire loan life cycle, including collections
and servicing.
ECOA - Anti-Discrimination
Requirements
ECOA prohibits discrimination in any aspect of
a credit transaction:
Applies to any extension of credit, whether
consumer or business, including extension
of credit to small businesses, corporations,
partnerships and trusts, and across loan's
life cycle.
ECOA also prohibits discouraging
application, which may impede access to
credit.
Other Fair Lending Laws
Other federal laws that relate to fair lending:
Community Reinvestment Act ("CRA")
(12 USC 2901 et. Seq.):
CRA and Regulation BB encourage
financial institutions to meet credit needs
of communities they serve. A poor "fair
lending" record can negatively affect CRA
rating and result in denial of applications
to open branch, relocate office, or acquire
another financial institution.
Fair Lending - Three Legal
Theories of Discrimination
Regulators or plaintiffs may bring fair lending
enforcement actions or litigation based on three
different legal theories of lending discrimination:
Overt discrimination.
Disparate treatment.
Disparate impact.
Fair Lending - Overt
Discrimination
Overt discrimination:
Direct evidence that lender intentionally
discriminated on prohibited basis or
expressed discriminatory preference, even
without acting on that preference.
Fair Lending - Disparate
Treatment
Disparate treatment:
Circumstantial evidence that lender
intentionally treated similarly situation
persons differently on prohibited basis.
Even if not motivated by prejudice or
conscious intent to discriminate, differences
in treatment are considered "intentional" if
no credible, non-discriminatory reason(s)
can be given to explain policy or practice.
Fair Lending - Disparate Impact
Disparate impact:
Evidence that lender applied neutral policy
or practice uniformly to all credit applicants,
but the policy or practice has a
disproportionately adverse impact on
members of protected class group without
proper business justification.
Fair Lending - Disparate Impact
Disparate impact description:
The effect of differential results that arise
from "practices that are facially neutral in
their treatment of different groups but that in
fact fall more harshly on one group than
another."
Fair Lending - Disparate Impact
Disparate impact description:
A plaintiff must:
Identify the specific policy or practice of
the defendant;
Establish a disparate impact through the
use of statistical evidence; and
Prove the existence of a causal link
between the identified policy and the
disparate impact.
Fair Lending - Other Forms of
Discrimination
Redlining:
Redlining is a practice of denying credit to
specific geographic areas due to race,
ethnicity or some other protected class of its
residents. Historically, concept of redlining
referred to lender's unwillingness to lend to
certain neighborhoods within urban cities
where minority populations were primarily
located.
Fair Lending - Other Forms of
Discrimination
Reverse redlining:
Reverse redlining is opposite concept, in
which protected classes are targeted for
certain products with less favorable terms,
conditions, and/or pricing on prohibited
basis.
UDAAP
Unfair, deceptive, or abusive acts or practices -
prohibited by Dodd-Frank:
Not limited to "Larger Participants" or
expressly regulated industries.
UDAAP compliance = key CFPB concern.
Interpretation of UDAAP up to CFPB.
Aimed at similar, yet broader, activity than state
"UDAP" laws.
Interplay Between UDAAP and
Fair Lending
UDAAP most powerful tool in CFPB arsenal:
Almost ANY practice can be attacked under
broad UDAAP standards applied by CFPB.
Fair lending as powerful alternative: "Disparate
impact" analysis, despite its questionable legal
footing under ECOA/FHA, may be used to
attack practices that, while not violating UDAAP,
have a disparate impact on protected classes.
UDAAP: Vagueness Concerns
- Defined Case-By-Case
"The possibilities here for injuring consumers are
almost limitless. Maybe a customer service
representative provided misleading information.
Maybe consumers were told only about the benefits
of a product and not about any of the limitations or
risky features. Maybe important information about
rates or fees was hidden or obscured. Or maybe
consumers were told that they would have the
chance to consider the matter further, and later
found they were already signed up and charged for
a service without ever giving their actual consent." CFPB Director Richard Cordray, Feb. 21, 2013
UDAAP "Unfairness" Standard
Causes, or likely to cause, substantial injury to
consumers;
The injury is not reasonably avoidable by
consumers; and
The injury is not outweighed by countervailing
benefits to consumers or to competition.
UDAAP "Unfairness" Standard
Important Considerations from CFPB
When determining monetary harm, consider that
an act or practice that causes a small amount of
harm to a large number of people may be
deemed to cause substantial injury.
Actual injury not required; significant risk of
concrete harm is sufficient.
UDAAP "Deceptive" Standard
The representation, omission, act or practice
misleads or is likely to mislead the consumer;
The consumer's interpretation of the
representation, omission, act or practice is
reasonable under the circumstances; and
The misleading representation, omission, act or
practice is material.
UDAAP "Abusive" Standard
Materially interferes with the ability of a
consumer to understand a term or condition of a
consumer financial product or service; or
Takes unreasonable advantage of:
A lack of understanding on the part of the
consumer of the material risks, costs, or
conditions of the product or service;
The inability of the consumer to protect its
interests in selecting or using a consumer
financial product or service.
CFPB and "Abusive" Practices
No rules further define "abusive."
Director Cordray: "I'll know it when I see it" [to
Senate, 2012].
UDAAP: Role of Complaints
CFPB admits that consumer complaints play a
key role in the detection of unfair, deceptive or
abusive practices.
Consumer complaints can indicate weaknesses
in elements of the institution's compliance
management system, such as training, internal
controls or monitoring.
Companies should track categories of
complaints reported by CFPB.
CFPB Enforcement of UDAAP
CFPB v. American Debt Settlement Solutions,
Inc., 9:13-cv-80548 (S.D. Fla. May 30, 2013): First enforcement action against entity for "abusive"
practices (UDAAP).
June 6, 2013 - Settlement and Final Order -
including:
Ban on debt relief products and services;
$499,247.96 in equitable monetary relief and
damages;
$15,000 civil money penalty; and
2 years of intense compliance monitoring by the
CFPB and reporting by ADSS.
CFPB Enforcement of Debt
Collection
CFPB v. Gordon, CV12-06147 (C.D. Cal.
July 18, 2012): CFPB obtained TRO freezing defendants' assets and
appointing temporary receiver.
Complaint alleges, among other things, that
defendants deceived consumers for mortgage relief
services.
CFPB Criminal Referral
U.S. v. Mission Settlement Agency, et al. (May 7,
2013 S.D.N.Y.).
CFPB civil enforcement action and complaint.
Simultaneous criminal indictment filed by U.S.
Attorney for SDNY.
Debt relief company, its president, and three
employees charged with mail fraud, wire fraud,
and conspiracy.
Unprecedented venture into criminal arena.
Disability
Bank of America
(DOJ Settlement Agreement, Sept. 2012):
Bank allegedly required disability income
documents and medical documentation for
mortgage loan applications. Bank agreed to
pay $125,000 to the complainants, conduct
additional training, and application
monitoring.
Fair Lending Risk Management
Compliance Management
Systems: CFPB Expectations
Four components to Compliance Management
System:
Board/Management Oversight: Involvement in
the entire process (creation, implementation, and
review).
Compliance Program: Independent of business
lines; includes policies, training, monitoring, and
corrective action.
Consumer Complaint Management Program.
Compliance Audits: Independent of compliance
and business functions; direct report to board of
directors.
CFPB UDAAP Examination
Training materials;
Disclosures, notices, agreements and account
statements;
Procedure manuals and written policies,
including those related to servicing and
collections;
Minutes of board and committee meetings,
particularly those relating to compliance;
Internal control monitoring and auditing
materials;
CFPB UDAAP Examination --
What Might Be Reviewed?
Compensation arrangements and incentive
programs;
Documentation regarding new product
development;
Marketing and advertising materials (disclosures
important);
Scripts for telemarketing and collections;
Organization charts;
Agreements with affiliates and third parties; and
Consumer complaint files.
UDAAP: Marketing "No-No"s
Targeting of the elderly and military;
Deceptive use of official-looking seals or logos to
suggest government endorsement;
Misrepresentation of costs, terms and risks;
Failure to completely disclose;
Claims that consumer would have no payments
in reverse mortgages even though there are
required payments (e.g., taxes, insurance);
Enclosure of mock checks; and
Suggestion of pre-approval of certain amount.
Compliance Questions
Does compliance with investor requirements
qualify as a legally sufficient justification?
HUD declined to expressly state that
compliance with third-party requirements
constitutes a legally sufficient justification
under the final rule.
Issue therefore unresolved.
Compliance Questions
Are increasing profits or avoiding losses
sufficient justifications?
HUD stated that what qualifies as a
substantial, legitimate, nondiscriminatory
interest is fact-specific and must be
determined on a case-by-case basis.
"Tipping Points" That Spur
Allegations
Common themes in the allegations of discriminatory
pricing or steering:
Broad discretion allegedly resulted in a
"disparate impact" on a prohibited basis;
A lack of clear policies and/or controls governing
the exercise of discretion;
Little or no documentation of the business
rationale for discretionary pricing adjustments;
Financial incentives for loan originators to charge
higher rates or fees or to steer borrowers to
higher cost products.
What Settlement Orders
Teach Us
Settlement orders have important implications for
the level of fair lending risk and financial exposure
facing lenders:
Potential liability can extend several years into
the past (e.g., as far back as 2004 in some
recent cases);
Broadly ranging investigations can be spawned
from a statistical disparity in a single geographic
area or from a consumer complaint or consumer
interest group study alleging discrimination;
Lenders face potential liability for the actions of
third parties such as mortgage brokers.
Key Settlement Themes
Key themes in settlement provisions:
Policies and procedures designed to avoid
discrimination.
Policies defining standards for discretionary
pricing and fees, such as:
Defined limits on pricing discretion.
Written explanations for amounts charged
in excess of some benchmark (including
from brokers).
A prohibition on funding loans that do not
comply.
Settlement Implications
Implications of settlement provisions for fair lending risk
management:
The terms of regulatory settlements tend, over time, to
become regulatory expectations.
Review, revise, and monitor policies, procedures, and
practices with respect to product offerings and pricing
outcomes.
Control, manage, and monitor discretion and
outcomes:
Manage discretionary pricing as you would exceptions,
whether or not they are considered policy exceptions.
Document business justifications for discretionary
pricing and underwriting decisions.