On June 29, 2016, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) jointly filed a complaint against a regional bank alleging that the bank discriminated against African-American borrowers in many aspects of its mortgage lending services. The agencies alleged that the bank’s discriminatory practices violated both the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act. Below we outline the primary allegations in the complaint, the main terms of the consent order, and the key takeaways from this recent action. This is the CFPB’s first use of mystery shoppers to identify discrimination in a fair lending enforcement action and may offer a sign of what’s to come.
- Redlining: The complaint alleges that the bank engaged in illegal redlining by (1) excluding majority-minority census tracts from its Community Reinvestment Act assessment area; (2) failing to open branches in majority-minority neighborhoods; and (3) failing to generate mortgage applications from minorities at rates comparable to those of its peers. The complaint also alleges that minority consumers were excluded from the bank’s marketing efforts.
- Denials: The complaint alleges that the bank discriminated in its underwriting of mortgage loans (including first and second lien mortgage loans and unsecured home improvement loans) by rejecting applications from African-American applicants at a higher rate than white applicants. The complaint claims that the bank’s community banking division’s underwriting guidelines gave employees “wide discretion” in approving or denying loans.
- Pricing: The complaint alleges that the bank charged higher loan prices, including APR and origination fees, to African-American borrowers as compared to white borrowers. The complaint notes that pricing factors were not documented and that the bank allegedly failed to ensure consistency in how the consumers’ risk factors were evaluated.
- Discriminatory Policy and Practice: The complaint alleges that the bank had an explicit policy that required its employees to provide denials to minority applicants more quickly than white applicants (within 21 days rather than ECOA’s 30 days). To further evaluate how the bank treated African-American applicants compared to white applicants, the CFPB sent testers to several of the bank’s branches. While the DOJ, the U.S. Department of Housing and Urban Development, and consumer advocacy groups have routinely used testers, this case marks the first time the CFPB has used testing, also called “mystery shopping,” to identify discrimination. The complaint alleges that the minority testers were steered toward higher-cost loans, were provided less favorable information regarding loan qualification criteria, and did not receive as robust information as white testers (e.g., pricing estimates and realtor recommendations).
Consent Order Relief:
Under the terms of the consent order, the bank must provide $2.78 million to African-American borrowers who were affected by the bank’s allegedly discriminatory policies, in addition to $4 million in loan subsidies to qualified applicants in minority neighborhoods; at least $300,000 on targeted outreach and advertising to foster loan applications from consumers in majority-minority neighborhoods; and $500,000 on partnerships with community-based or governmental organizations that provide assistance in minority neighborhoods. The bank is enjoined from discriminating in any aspect of a residential real-estate transaction, must revise its fair lending compliance management system, and must put in place policies that prevent discriminating against minority borrowers in any aspect of mortgage lending.
African-American customers who were discriminated against by being denied mortgage loans will also be able to apply for a new loan at a subsidized interest rate. The bank is also required to open a new branch or loan production office in a majority-minority neighborhood. Finally, the bank must pay a $3,030,756 million civil money penalty to the CFPB.
This consent order touches on many of the fair lending risks that lenders face in originating mortgage loans. Although the prospective relief appears to be similar to recent settlements, lenders should take note of a few key points:
- Training: The consent order requires that the bank improve its fair lending training, including providing information on implicit bias.
- Pricing Testing: The consent order requires the bank to limit controls in its note rate disparities statistical testing to only those factors used in pricing loans.
- Pricing Remuneration: The bank must provide remuneration to minority consumers based on disparities found in pricing testing and document its plans for remuneration in its pricing compliance plan.
- Underwriting Monitoring: The consent order requires the bank to continue to perform second reviews on all denied loans. It must also provide remuneration to minority consumers based on denial disparities.
- Policies and Procedures: The consent order requires the bank to adopt or revise diversity policies and procedures. It further requires the bank to adopt or revise procedures to help ensure that the bank provides equal information and assistance to all consumers, regardless of race or other protected characteristics.
Lenders should consider evaluating their origination practices against this new settlement to ensure that they are minimizing their fair lending risk.