As the
financial industry is transfixed on federal banking regulators' efforts to
modernize regulations on redlining and other Community Reinvestment Act (CRA) issues,
another government agency seems poised to make its own moves addressing fair
lending matters this year: the Consumer Financial Protection Bureau (CFPB).
After examining
data referenced in the bureau’s blog post titled “The CFPB’s enforcement work
in 2023 and what lies ahead,” Garris Horn LLP Co-Managing Partner John Levonick
spoke with Dodd Frank Update about what he believes institutions should
expect to see from the bureau in terms of supervision and enforcement activity.
Fair lending
enforcement
Although the
CFPB is not likely to attempt to test the limits of its CRA supervisory
authority outside of the interagency rule finalized by the Federal Reserve,
Federal Deposit Insurance Corp. (FDIC) and the Office of the Comptroller of the
Currency (OCC), Levonick expects to see the bureau actively pursuing fair
lending enforcement actions and working in lock-step with the prudential
regulators on supervisory matters.
“I would
imagine that the bureau would either be working in conjunction with state
regulators or the federal regulators,” Levonick said. “It’s highly unlikely
they would ever be working independently. In my opinion, it’s unlikely that any
bad actions under the CRA would come to light only to the bureau. The bureau
has got, obviously, a very aggressive enforcement mechanism. I would say the
CFPB is more aggressive than its other agency counterparts – the OCC and FDIC –
in terms of using it.”
One
long-standing issue for covered entities has been the relative vagueness
surrounding the bureau’s rules and regulations and its reliance on enforcement actions
to clarify what it deems a fair lending violation. That is not likely to
change.
“It’s a
full-time job for a financial institution to monitor enforcement actions,” Levonick
said. “Assessing the drivers for certain enforcement actions is challenging
because companies often sign non-disclosure agreements. So the bureau is the
only one really allowed to talk about what the discriminatory elements might
have been that led to an enforcement action. They can basically create their
own narrative through enforcement actions.”
The number of
advertisements the CFPB has published looking for data analysts and enforcement
attorneys also signals to Levonick that the bureau plans to stay busy
throughout the year.
Short-term
lenders
The cyclical
nature of the industry and years of experience lead Levonick to believe the
sluggish economy will mean a continuing rise in the number of short-term
lending products available to consumers who find themselves cash-strapped
between paychecks. Inevitably, this will lead to a rise in predatory lending practices
among these providers, he said.
“Drawing from
having had a front-row seat when access to credit goes down and interest rates
go up while people’s income remained stagnant, they turn to debt services or short-term
lending when they need access to cash in between pay periods,” Levonick said. “Traditional
short-term lending is high risk and, as a result, has extremely high interest
rates – risk-based pricing. What’s happened historically is these consumers get
caught up in a debt spiral, where the dependence on short-term lending gets
more and more aggressive because they’re in a worse position.”
The CFPB has
not indicated plans to alter its regulations on short-term lending activities
but Levonick believes it probably does not feel it’s necessary as its current
rules are likely sufficient to support its enforcement actions.
Data privacy,
transparency
Along with fair
lending, data privacy also will continue to be a top priority for the CFPB, Levonick
said. As he said when speaking to Dodd Frank Update late last year, the
bureau is looking for institutions to “show their work” when making credit
decisions, particularly when doing so using artificial intelligence (AI). He
expects to see the bureau continuing to focus on ensuring transparency in
credit decisions.
“You have to
give specific reasons why you declined somebody, according to ECOA (Equal
Credit Opportunity Act) and then show what the elements were that you looked
at,” Levonick said. “I think we’re in the infancy stage of the use of AI, and the
technology seems to work. But the obligation to show how it works and why it’s
accurate is important for consumers to see and understand.”
He also expects
the bureau to continue to emphasize the importance of protecting consumers’
data against bad actors, especially as companies continue to gather more and
more consumer data for credit determinations and to attempt to identify
disparate impacts.
Key
variables to watch
Two main
factors could play a decisive role in determining how aggressive the CFPB will
be with its fair lending enforcement mechanism, Levonick said.
The first
involves the lawsuit filed by some of the country’s largest banking trade
organizations against the prudential regulators, calling for the CRA rule to be
vacated.
“It might have
a chilling effect temporarily where the bureau might take a wait-and-see
approach,” Levonick said. “There are some pretty heavy-hitters in that lawsuit
that they don’t want to upset. But I still think that, obviously, fair lending
is a primary concern of the bureau.”
The second potential
variable that could impact the bureau’s enforcement activity will come in
November. Levonick said that if the Trump administration ends up back in power,
the bureau will likely not be as active as if the Biden administration is
reelected.