Where have all the CFPB fair-lending cases gone?
Despite assurances by the Consumer Financial Protection Bureau that it is serious about cracking down on fair-lending violations, the lack of any CFPB enforcement actions regarding redlining and other discriminatory practices in two years worries consumer and civil rights advocates.
Neither CFPB Director Kathy Kraninger nor her predecessor, former acting Director Mick Mulvaney, has filed any fair-lending enforcement orders or referred possible Equal Credit Opportunity Act violations to the Department of Justice, in sharp contrast to the Obama administration.
Industry lawyers say the CFPB is still focused on fair-lending exams, and Kraninger told lawmakers in October that the agency was conducting investigations. Yet the lack of public enforcement activity over such a long stretch concerns agency critics who say discrimination in the financial services sector still exists and is a barrier to minorities' financial well-being.
"The absence of fair-lending cases isn’t because we’ve successfully ended discrimination," said Vanita Gupta, president and CEO of the Leadership Conference on Civil and Human Rights and the former head of the Justice Department's civil rights division. "It is, however, reflective of our new reality: Enforcement in this area has largely halted. The CFPB and the Department of Justice have an obligation to look out for discriminatory activity — which remains illegal — and to fight on behalf of those being harmed."
While credit unions have not historically faced the bureau's ire over fair-lending issues, largely because only a handful of CUs are subject to CFPB oversight, the topic is still relevant to the industry. NCUA board member Todd Harper earlier this year dinged the agency for what he sees as inadequate consumer oversight. Harper subsequently proposed increasing regulation at CUs of $1 billion assets and above to better provide consumer protections and fair housing exams, but that plan was scuttled last week when the NCUA board approved next year's budget.
Under the Trump administration, the CFPB has signaled a desire to pull back from enforcement actions generally and fair-lending investigations specifically. In an April speech, Kraninger said the agency was refocusing on supervision instead of enforcement. And last year, Mulvaney had stripped the agency's Office of Fair Lending of enforcement powers.
The drop in CFPB fair-lending cases can be attributed to a number of other factors. Mulvaney had instituted a temporary halt to all enforcement actions after coming aboard. Discrimination and redlining cases also take more time.
“It could suggest the industry is doing a better job of monitoring their fair-lending compliance, or cases are taking more time to develop,” said Tim Burniston, senior adviser and regulatory strategist at Wolters Kluwer.
"I think the regulators are continuing to do fair-lending exams and it’s still a priority, but why the number of pattern and practice cases has declined, I can’t wrap my arms around it except they take time to develop. "
He added that a drop in fair-lending cases and referrals is not limited to the CFPB.
“There is not only a substantial drop-off in referral activity from the CFPB to DOJ, but also a substantial drop-off by every other bank regulator that has [ECOA] responsibilities as well, he said.
The agency was more active in fair-lending enforcement under the Obama administration. The CFPB made 40 lending discrimination referrals to the Justice Department since 2011, peaking at 15 in 2014 but dropping to just two in 2017.
Lawyers who defend institutions targeted by the CFPB say the bureau is still focused on fair-lending exams through its nonpublic supervisory work. The bureau has conducted exams of a number of nonbank mortgage lenders in the past two years, lawyers say, but the exams ended without any findings of redlining or discrimination.
“We have seen a good bit of activity on the supervision side with fair lending, but nothing that is going to become public, and a lot of it started a long time ago,” said Christopher Willis, a partner at Ballard Spahr.
Others said the bureau has not prioritized fair-lending enforcement actions because Republicans have long opposed the agency’s use of “disparate impact” theory, which holds that lenders can be found liable for racial discrimination even if it was unintentional.
When Congress passed a resolution last year to repeal the CFPB's guidance on discrimination in auto lending, Mulvaney, now the White House chief of staff, told consumer advocates that the CFPB could no longer pursue disparate impact claims, according to some who attended a meeting with him.
Although the Supreme Court in 2015 upheld the disparate impact theory under the Fair Housing Act, the high court's 5-4 decision was interpreted to limit the ability of consumers and federal agencies to file claims. The high court said plaintiffs have to prove a defendant’s policies caused the alleged disparity.
Consumers also would have to follow a five-step framework to prove discrimination under an August proposal by the Department of Housing and Urban Development. They would have to show that a policy or practice is "arbitrary, artificial and unnecessary" to move forward with a claim.
Some are concerned that the CFPB will go further by reexamining how it enforces the ECOA, the 1974 law that protects consumers from discrimination based on race, sex, age and other variables.
“We know that communities of color are disproportionately harmed, and the government must live up to its responsibility to enforce the law,” Gupta said. "The retreat from lending enforcement coupled with the administration’s attack on disparate impact, which provides tools for challenging more common, less overt discrimination based on implicit bias, leaves communities more vulnerable than ever."
Consumer advocates also point to a proposal on Home Mortgage Disclosure Act data that Kraninger issued in May that would potentially exempt 85% of banks and credit unions from HMDA reporting. HMDA data is used to examine and identify fair-lending violations.
In October, the CFPB gave a second, two-year exemption from HMDA requirements to institutions that offer fewer than 500 open-end lines of credit. Kraninger also plans to reopen the Obama-era HMDA rule written in 2015 to make those exemptions permanent.
"They’ve made it easier to hide patterns of discrimination by raising the threshold for reporting, which makes it harder for civil rights lawyers or state attorneys general to draw conclusions when the data is not available," said Linda Jun, senior policy counsel at Americans for Financial Reform, a nonprofit coalition. "So in addition to not going after any bad guys in two years, they are making it a lot harder to find those patterns of discrimination."
With the backdrop of so many changes to fair lending, House Democrats grilled Kraninger in October about the bureau’s efforts to ferret out discrimination in home loans.
“This is the first time in its history that there has been a six-month period where there has been no discrimination in lending occurring in this country,” said Rep. Joyce Beatty, D-Ohio. “Do you really expect me to believe that?”
Kraninger reiterated her commitment to fair lending.
“I can assure you that we do have fair-lending examinations, fair-lending investigations that are open and ongoing,” she told Beatty. Enforcement cases "definitely are not a measure of when discrimination is happening in the marketplace, but it is our best effort looking at referrals from other agencies, looking at our complaints, looking at what’s happening in the marketplace where we’re bringing investigations and career bureau attorneys are taking those investigations where they can based on the facts and circumstances and carrying them through to conclusion or closing them.”
In response to a question from Rep. Alma Adams, D-N.C., Kraninger said that the CFPB historically has conducted 13 fair-lending exams at any given time, and during her leadership it has had 10 exams.
“I can assure you that I am committed to it,” Kraninger said. “Part of this is also the hiring process of getting more examiners on board. We have 300 examiners who have taken fair-lending training, and are able to be engaged in fair-lending exams. I do commit to again a similar level, not an exact level, but a continued commitment to fair lending, I pledged and believe I’m meeting."
Still, the focus of fair lending has changed dramatically under Kraninger and Mulvaney. One of Mulvaney’s first moves in 2018 was to dismantle the CFPB’s Office of Fair Lending. He removed its enforcement powers and placed the office under a separate division focused on advocacy and education. The bureau’s Office of Supervision, Enforcement and Fair Lending does not have a separate fair-lending unit.
“They appear to be in a mode where they are more restrained about [fair lending] right now,” Willis said.
Still, others suggested that if Kraninger does file a lawsuit on fair lending, it will happen closer to the 2020 presidential election.
"The CFPB may have lawsuits to file against consumer abuse but they may be waiting until it’s closer to the elections before filing or to roll something out, but it will probably be something very minimal," said Jeanetta Williams, president of the NAACP Salt Lake Branch and Tri-State Conference of Idaho, Nevada and Utah.