Alston & Bird Consumer Finance Blog

Equal Credit Opportunity Act (ECOA)

Joint Trade Associations Reject the CFPB’s “Discrimination-Unfairness” Theory

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In a June 28 letter to Director Chopra and accompanying White Paper and press release, the ABA, CBA, ICBA, and the U.S. Chamber of Commerce have called on the Consumer Financial Protection Bureau (CFPB or Bureau) to rescind recent revisions made to its UDAAP examination manual that had effectuated the CFPB’s controversial theory that alleged discriminatory conduct occurring outside the offering or provision of credit could be addressed using “unfairness” authority. The White Paper characterized the primary legal flaws in the CFPB’s action as follows:

  • The CFPB’s conflation of unfairness and discrimination ignores the text, structure, and legislative history of the Dodd-Frank Act. For example, the Dodd-Frank Act discusses “unfairness” and “discrimination” as two separate concepts and defines “unfairness” without mentioning discrimination. The Act’s legislative history refers to the Bureau’s antidiscrimination authority in the context of ECOA and HMDA, while referring to the Bureau’s UDAAP authority separately.
  • The CFPB’s view of “unfairness” is inconsistent with decades of understanding and usage of that term in the Federal Trade Commission Act and with the enactment of ECOA. Congress gave the CFPB the same “unfairness” authority that it gave to the Federal Trade Commission in 1938, which has never included discrimination. It makes no sense that Congress would have enacted ECOA in 1974 to address discrimination in credit transactions if it had already prohibited discrimination through the FTC’s unfairness authority. For the same reason, Congress could not have intended in 1938 for unfairness to “fill gaps” in civil rights laws that did not exist.
  • The CFPB’s view is contrary to Supreme Court precedent regarding disparate impact liability. The CFPB’s actions and statements indicate it conflates unfairness with disparate impact, or unintentional discrimination. The Supreme Court has recognized disparate impact as a theory of liability only when Congress uses certain “results-oriented” language in antidiscrimination laws, e.g., the Fair Housing Act. The Dodd Frank Act neither contains the requisite language, nor is it an antidiscrimination law.
  • The CFPB’s action is subject to review by courts because it constitutes final agency action – a legislative rule – that is invalid, both substantively and procedurally. The CFPB’s action carries the force and effect of law and imposes new substantive duties on supervised institutions. However, the Bureau did not follow Administrative Procedure Act requirements for notice-and-comment rulemaking. Additionally, the CFPB’s interpretation is not in accordance with law and exceeds the CFPB’s statutory authority. The CFPB’s action should be held unlawful and set aside.
  • The CFPB’s action is subject to Congressional disapproval under the Congressional Review Act. A Member of Congress can request a GAO opinion on whether the CFPB’s actions are a rule, which can ultimately trigger Congressional review using the procedures established in the Congressional Review Act.

The White Paper concludes:

“Such sweeping changes that alter the legal duties of so many are the proper province of Congress, not of independent regulatory agencies, and the CFPB cannot ignore the requirements of the Administrative Procedures Act and Congressional Review Act. The CFPB may well wish to ‘fill gaps’ it perceives in federal antidiscrimination law. But Congress has simply not authorized the CFPB to fill those gaps. If the CFPB believes it requires additional authority to address alleged discriminatory conduct, it must obtain that authority from Congress, not take the law into its own hands. The associations and our members stand ready to work with Congress and the CFPB to ensure the just administration of the law.”

Take-away:

The position taken in the White Paper that the CFPB’s actions were contrary to law may be an indication that the trade groups intend to mount an APA legal challenge. Alternatively, the arguments made could in theory form a defense to any CFPB supervisory or enforcement action premised upon its new “discrimination-unfairness” theory. Financial institutions subject to CFPB examination would be well-advised to consider the arguments raised by the groups.

CFPB Continues Scrutiny of Algorithmic Technology

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On May 26, 2022 the Consumer Financial Protection Bureau released a Consumer Financial Protection Circular stating that creditors utilizing algorithmic tools in credit making decisions must provide “statements of specific reasons to applicants against whom adverse action is taken” pursuant to ECOA and Regulation B. The CFPB previously stated that circulars are policy statements meant to “provide guidance to other agencies with consumer financial protection responsibilities on how the CFPB intends to enforce federal consumer financial law.” The circular at issue posits that some complex algorithms amount to an uninterpretable “black-box,” that makes it difficult—if not impossible—to accurately identify the specific reasons for denying credit or taking other adverse actions. The CFPB concluded that “[a] creditor cannot justify noncompliance with ECOA and Regulation B’s requirements based on the mere fact that the technology it employs to evaluate applications is too complicated or opaque to understand.”

This most recent circular follows a proposal from the CFPB related to review of AI used in automated valuation models (“AVMs”). As we noted in our previous post on that topic, the CFPB stated that certain algorithmic systems could potentially run afoul of ECOA and implementing regulations (“Regulation B”). In that prior outline of proposals with respect to data input, the CFPB acknowledged that certain machine learning algorithms may often be too “opaque” for auditing. The CFPB further theorized that algorithmic models “can replicate historical patterns of discrimination or introduce new forms of discrimination because of the way a model is designed, implemented, and used.”

Pursuant to Regulation B, a statement of reasons for adverse action taken “must be specific and indicate the principal reason(s) for the adverse action. Statements that the adverse action was based on the creditor’s internal standards or policies or that the applicant, joint applicant, or similar party failed to achieve a qualifying score on the creditor’s credit scoring system are insufficient.” In the circular, the CFPB reiterated that, in utilizing model disclosure forms, “if the reasons listed on the forms are not the factors actually used, a creditor will not satisfy the notice requirement by simply checking the closest identifiable factor listed.” In another related advisory opinion, the CFPB earlier this month also asserted that the provisions of ECOA and Reg B applies not just to applicants for credit, but also to those who have already received credit. This position echoes the Bureau’s previous amicus brief on the same topic filed in John Fralish v. Bank of Am., N.A., nos. 21-2846(L), 21-2999 (7th Cir.). As a result, the CFPB asserts that ECOA requires lenders to provide “adverse action notices” to borrowers with existing credit. For example, the CFPB asserts that ECOA prohibits lenders from lowering the credit limit of certain borrowers’ accounts or subjecting certain borrowers to more aggressive collections practices on a prohibited basis, such as race.

The CFPB’s most recent circular signals a less favorable view of AI technology as compared to previous statements from the Bureau. In a blog post from July of 2020, the CFPB highlighted the benefits to consumers of using AI or machine learning in credit underwriting, noting that it “has the potential to expand credit access by enabling lenders to evaluate the creditworthiness of some of the millions of consumers who are unscorable using traditional underwriting techniques.” The CFPB also acknowledged that uncertainty concerning the existing regulatory framework may slow the adoption of such technology. At the time, the CFPB indicated that ECOA maintained a level of “flexibility” and opined that “a creditor need not describe how or why a disclosed factor adversely affected an application … or, for credit scoring systems, how the factor relates to creditworthiness.” In that prior post, the CFPB concluded that “a creditor may disclose a reason for a denial even if the relationship of that disclosed factor to predicting creditworthiness may be unclear to the applicant. This flexibility may be useful to creditors when issuing adverse action notices based on AI models where the variables and key reasons are known, but which may rely upon non-intuitive relationships.” That post also highlighted the Bureau’s No-Action Letter Policy and Compliance Assistance Sandbox Policy as tools to help provide a safe-harbor for AI development. However, in a recent statement, the CFPB criticized those programs as ineffective and it appears those programs are no longer a priority for the Bureau. So too, that prior blog post now includes a disclaimer that it “conveys an incomplete description of the adverse action notice requirements of ECOA and Regulation B, which apply equally to all credit decisions, regardless of the technology used to make them. ECOA and Regulation B do not permit creditors to use technology for which they cannot provide accurate reasons for adverse actions.” The disclaimer directs readers to the CFPB’s recent circular as providing more information. This latest update makes clear that the CFPB will closely scrutinize the underpinnings of systems utilizing such technology and require detailed explanations for their conclusions.

CFPB’s SBREFA Outline on Automated Valuation Models Rekindles Debate over Disparate Impact Liability under the ECOA

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Section 1473(q) of the Dodd-Frank Act (now codified at 12 U.S.C. § 3354(q)) amended the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) to instruct the CFPB, Fed, OCC, FDIC, NCUA, and FHFA (collectively, the “agencies”) to jointly develop regulations for quality control standards for automated valuation models (“AVMs”), defined as “any computerized model used by mortgage originators and secondary market issuers to determine the collateral worth of a mortgage secured by a consumer’s principal dwelling.” As part of the rulemaking process, the Small Business Regulatory Enforcement Fairness Act of 1996 (“SBREFA”) requires the CFPB to convene a Small Business Review Panel to consider whether the rule could have a significant economic impact on a substantial number of small entities. Accordingly, on February 23, 2022, the CFPB released an outline of proposals and alternatives under consideration by the agencies to seek informed feedback and recommendations from small businesses likely to be subject to the rule.

As amended, subparts (1) – (4) of FIRREA Section 1125(a) mandate that the agencies establish four specific quality control standards for AVMs. FIRREA Section 1125(a)(5) also affords the agencies discretion to adopt standards designed to “account for any other such factor that the agencies…determine to be appropriate.” As such, the CFPB’s SBREFA outline proposes creating a fifth such discretionary quality control standard “designed to protect against unlawful discrimination.”

In support of its proposal, the CFPB asserts that algorithmic systems such as AVMs are subject to Federal nondiscrimination laws, including the Equal Credit Opportunity Act (“ECOA”), because a lender evaluating an applicant’s collateral could use an AVM “in a way that would treat an applicant differently on a prohibited basis or result in unlawful discrimination against an applicant on a prohibited basis.” The CFPB then notes that it recognizes three different methods of proving discrimination under the ECOA and its implementing regulation (“Regulation B”): (1) overt discrimination; (2) disparate treatment; and (3) disparate impact. It is worth mentioning that overt discrimination has been viewed by federal regulators such as DOJ and the FDIC as a blatant type of disparate treatment that does not require an inference or presumption based on circumstantial evidence. However, it appears that the CFPB considers these theories to be distinct from one another.

The third method of proving discrimination articulated by the CFPB, disparate impact, has been a controversial theory of liability because it imposes liability on a creditor even where the creditor had no intent to discriminate against an applicant. Rather, the theory presumes that the creditor has treated applicants fairly and consistently in accordance with some facially neutral policy or procedure of the creditor. Of course, the disparate impact theory gained traction in the subprime lending cases post-2008 and then loomed large in the CFPB’s enforcement actions against indirect auto lenders, the latter of which were scrutinized by Congress in its decision to rescind the CFPB’s indirect auto lending guidance using the Congressional Review Act. In fact, it remains a legal question whether disparate impact claims are cognizable under the ECOA since the United States Supreme Court (“Supreme Court”) has never considered the issue, though civil rights advocates point to the Supreme Court’s willingness in the 2015 Inclusive Communities case to recognize the theory for discrimination claims brought under the Fair Housing Act (“FHA”).

Thus, should the agencies adopt a final rule that relies upon disparate impact under the ECOA as a legal basis to justify imposing a quality control standard on AVMs (or muddies the waters by relying upon both the ECOA and the FHA without distinction), it is possible that the rule could be challenged under the Administrative Procedures Act as not in accordance with the law. Alternatively, if the CFPB were to bring an enforcement action against a creditor for allegedly violating either the final rule’s quality control standard or ECOA itself on the basis of disparate impact, the creditor could defend itself by arguing among other things that disparate impact claims are not cognizable under the ECOA. Indeed, the ECOA lacks any “results-oriented” language like the “otherwise make available” language of the FHA or the “otherwise adversely affect” language of the Age Discrimination in Employment Act, which the Supreme Court, in decisions issued a decade apart, relied on in recognizing disparate impact liability.

Even if the plain language of the ECOA could not support a disparate impact claim, the CFPB might argue that the statute’s anti-discrimination provision is ambiguous (by asserting, for instance, that the word “discriminate” could be interpreted to encompass both intent-based and effects-based actions), in which case the CFPB may expect the reviewing court to grant its interpretation Chevron deference. See Chevron, U.S.A. v. Natural Resources Defense Council, Inc. 476 U.S. 837 (1984). But this argument also might prove difficult because Chevron deference is appropriate only when it appears that Congress has “delegated authority to the agency generally to make rules carrying the force of law, and … the agency interpretation claiming deference was promulgated in the exercise of such authority.” See Public Citizen, Inc. v. U.S. Dept. of Health and Human Services, 332 F.3d 654, 659 (D.C. Cir. 2003) (quoting U.S. v. Mead Corp., 533 U.S. 218 (2001)). In examining Regulation B, which was originally issued by the Fed and subsequently readopted by the CFPB, the only references to the concept of disparate impact appear in 12 C.F.R. § 1002.6(a) and Official Interpretation 6(a)-2. However, these provisions merely summarize the ECOA’s legislative history and Supreme Court precedent under Title VII of the Civil Rights Act, and even then, acknowledge only that the ECOA “may” prohibit acts that are discriminatory in effect. The CFPB has articulated its belief that disparate impact is cognizable under the ECOA elsewhere, including in a compliance bulletin and its examination manual, but those materials carry no force of law under the CFPB’s own recently-adopted rule. Thus, a reviewing court could conclude that the mere recitation of legislative history and of a judicial doctrine developed under an unrelated statute was not an actual exercise of rulemaking authority under the ECOA, and therefore that the agencies’ interpretation of the ECOA as expressed in Regulation B is not entitled to Chevron deference. In that circumstance, the reviewing court would be free to resolve any purported ambiguity in the ECOA according to its own construction, affording respect to the agencies’ position only to the extent it is persuasive. And should either of these issues – disparate impact under the ECOA or the availability of Chevron deference – ultimately be appealed to the Supreme Court, there may well be four justices willing to grant certiorari to consider them.

The uncertain outcome of any challenge to the CFPB’s use of disparate impact in a rulemaking or in enforcing the ECOA, given the stakes involved, suggests that the CFPB may seek to resolve matters via settlement rather than risking litigation in federal court. However, only time will tell whether the CFPB is spoiling for a fight.

Modern-Day Redlining Enforcement: A New Baseline

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On October 22, 2021, the U.S. Department of Justice (DOJ) announced an aggressive new initiative, in collaboration with U.S. Attorneys’ Offices throughout the country, to combat the practice of redlining. Three days prior, the Consumer Financial Protection Bureau (CFPB) was said to be hiring up to 30 new enforcement attorneys to focus on redlining and other fair lending enforcement. While these developments are not surprising for an Administration that has emphasized the importance of promoting racial equity, particularly in homeownership, this swift and purposeful action by federal regulators signals that these agencies mean business. Indeed, as evidence of this new priority, federal regulatory agencies have issued two multimillion–dollar redlining settlements against financial institutions just in the past two months.

Since the early 1990s, federal regulatory agencies have recognized redlining as a type of illegal “disparate treatment” (i.e., intentional) discrimination that violates federal fair lending laws such as the Fair Housing Act and the Equal Credit Opportunity Act (ECOA). For example, in 2009, the agencies defined the term “redlining” as a form of disparate treatment discrimination where a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other protected characteristic of the residents of the area where the credit seeker resides or will reside or where the residential property to be mortgaged is located. As recently as 2019, the DOJ continued to use the term “redlining” to refer to a practice whereby “lenders intentionally avoid providing services to individuals living in predominantly minority neighborhoods because of the race of the residents in those neighborhoods.”

To that end, the earliest redlining enforcement actions were brought against banks whose alleged intent to discriminate could be the only explanation for the bank’s geographic distribution of loans around, but not in, minority communities. As proof of a bank’s intent to discriminate, the DOJ produced brightly colored maps to support its position that a bank had unnaturally drawn its service area boundaries to circumvent minority neighborhoods from its mortgage lending and then painstakingly adhered to this “red line” to avoid serving these neighborhoods. In Atlanta, one bank allegedly drew a red line down the railroad tracks that divided the city’s white and black neighborhoods, while in the District of Columbia, another bank allegedly drew its own line down the 16th Street corridor. Years later, in Detroit and Minneapolis-St. Paul, still other banks were alleged to have served a virtual “horseshoe” encompassing white neighborhoods while carving out minority neighborhoods. And again, in Indianapolis, a bank allegedly drew an “Indy Donut” that encircled and excluded the minority areas in the center of the city. In these cases, given that the banks were required by the Community Reinvestment Act (CRA) to define the areas they intended to serve, the DOJ pointed to the banks’ use of different, and in some cases, oddly shaped, service area boundaries (as opposed to existing legal borders or contiguous political subdivisions) as evidence of intent to discriminate.

Today, the majority of mortgage loans in the United States are made by nonbank mortgage lenders that, while not subject to the CRA’s requirements, remain bound by the antidiscrimination provisions of the Fair Housing Act and ECOA. In lieu of maps and service area boundaries, federal regulators now look to the loan application and origination data reported by the lender under the Home Mortgage Disclosure Act (HMDA) as the starting point for a redlining investigation. If the HMDA data suggests that a mortgage lender’s generation of mortgage loan applications or originations in majority-minority census tracts might not be as strong as that of its “peers” (e.g., similarly sized competitors), a federal regulator may initiate an investigation to determine whether the lender has violated fair lending laws. Of course, because data about “racial imbalance” has been deemed by the U.S. Supreme Court to be insufficient for establishing a prima facie case of discrimination, a federal regulator must supplement the data with evidence that the lender’s arguably weaker performance in minority neighborhoods may have resulted from an intent to discriminate by excluding or otherwise treating those areas differently.

Recently, however, the evidence cited by federal regulators to establish redlining has evolved and expanded significantly. Specifically, regulators appear to be relying on a “discouragement” theory of redlining that looks at the totality of the circumstances to determine whether a reasonable person would have been discouraged from applying for a loan product or service – perhaps regardless of whether the lender intended to discriminate. It is worth noting that this theory derives from ECOA’s implementing regulation, Regulation B, which extends the statute’s protections to “potential” applicants, and is not found in the language of ECOA itself.[1] While a lender is prohibited by Regulation B from making discouraging oral or written statements to an applicant on the basis of race or other protected characteristic, long-standing federal agency guidance indicates that a finding of discouragement necessarily requires some evidence of differential treatment on a prohibited basis. Traditional examples of discouragement have included the use of phrases such as “no children” or “no wheelchairs” or “Hispanic residence,” or a statement that an applicant “should not bother to apply.” In contrast, recent redlining enforcement suggests that federal regulators may be interested in the multitude of factors that could have contributed to a lender’s observed failure to reach minority neighborhoods, which, when taken together, may prove the lender’s intent to discriminate.

For example, federal regulators appear to be scrutinizing a lender’s marketing efforts and strategies to determine whether the lender has sufficiently prioritized minority areas. Prior to 2020, redlining cases highlighted the lender’s alleged failure to market in minority areas by intentionally treating these areas differently, either by allegedly excluding such areas from any marketing campaigns or using different marketing materials, such as solicitations or offers, for white versus minority areas.[2] The most recent redlining cases, however, suggest that lenders’ marketing strategies might need to go beyond treating white and minority neighborhoods consistently. Specifically, in its summer 2021 Supervisory Highlights, the CFPB called out a lender that had engaged in redlining by marketing via “direct mail marketing campaigns that featured models, all of whom appeared to be non-Hispanic white” and using only “headshots of its mortgage professionals in its open house marketing materials … who appeared to be non-Hispanic white.” Notably, the CFPB did not indicate that the lender had marketed to, and conducted open houses in, white neighborhoods while excluding minority neighborhoods, nor that the lender had used different marketing materials for white versus minority neighborhoods. Rather, the CFPB’s claim effectively acknowledges that residents of minority neighborhoods would have received the same marketing materials as any other neighborhood. Yet the CFPB’s position appears to be that the use of white models and white employees in these otherwise neutral marketing materials would have discouraged a prospective applicant in a minority area, regardless of whether the lender intended to discourage anyone or not.

Indeed, recent redlining enforcement suggests that not only will regulators allege it insufficient to treat all applicants and neighborhoods the same, but a lender must undertake affirmative action to specifically target minority neighborhoods. This approach attempts to impose unprecedented, CRA-like obligations on nonbank mortgage lenders to proactively meet the needs of specific neighborhoods or communities and ensure a strong HMDA data showing – or else be subject to redlining enforcement. For example, the July 2020 complaint filed by the CFPB against Townstone Financial Inc. claimed that the lender had “not specifically targeted any marketing toward African-Americans.” Along the same vein, the August 2021 settlement between the DOJ, Office of the Comptroller of the Currency (OCC), and a bank in the Southeast resolved allegations that the lender had failed to “direct” or “train” its loan officers “to increase their sources of referrals from majority-Black and Hispanic neighborhoods.” Of course, lenders understand that “specifically targeting” prospective customers or neighborhoods on the basis of race or other protected characteristic is not required by, and may present its own risk under, fair lending laws. Indeed, the CFPB has suggested that the industry might benefit from “clarity” of how to use “affirmative advertising” in a compliant manner. Similarly, the CFPB’s allegation that Townstone had “not employ[ed] an African-American loan officer during the relevant period, even though it was aware that hiring a loan officer from a particular racial or ethnic group could increase the number of applications from members of that racial or ethnic group” was not only irrelevant since the lender’s main source of marketing was mass market radio advertisements but also presumptive and problematic from an employment-law perspective.

Setting aside the legal questions raised by this expanded approach to redlining, mortgage lenders will also face practical considerations when assessing potential fair lending risk. Given the mortgage industry’s extensive use of social media, lead generation, artificial intelligence, and other technologies to carry out marketing strategies and disseminate marketing material, an inquiry by a federal regulator into potential discouragement of certain applicant groups or areas could be endless. Could every statement or omission made by an employee on any form of media be relevant to a redlining investigation? How many statements or omissions would it take for a federal regulator to conclude that a lender has engaged in intentional, differential treatment based on race or other protected characteristic? To that end, could personal communications between employees, which are not seen by the public, and thus could not have the effect of discouraging anyone from applying for a loan, nevertheless be sought by a federal regulator to further a case of intentional discrimination? The language of recent redlining cases suggests that a regulator may find these communications relevant to a redlining investigation even if they do not concern prospective applicants.

Ultimately, both federal regulators and mortgage industry participants must work together to promote homeownership opportunities in minority areas. But along the way, a likely point of contention will be whether enforcement should be imposed on a lender’s alleged failure to develop and implement targeted marketing strategies to increase business from minority areas, such as expanding the lender’s physical presence to minority areas not within reasonable proximity to the lender’s existing offices, conducting marketing campaigns directed exclusively at minority areas, and recruiting minority loan officers for the specific purpose of increasing business in minority areas. Such an approach might overstate the meaningfulness of physical presence and face-to-face interaction in the digital age, when lenders rely heavily on their online presence.

Of course, there may be legitimate, nondiscriminatory business reasons for a lender’s chosen approach to its operations and expansion. It remains to be seen whether those reasons will be sufficient to assure a federal regulator that the lender’s arguably weak performance in a minority area was not the result of redlining. However, given that nearly all precedent regarding redlining has been set by consent orders and has yet to be tested in the courts, the outcome of any particular investigation will greatly depend on the lender’s willingness to delve into these issues.

[1] See 12 CFR § 1002.4(b), Comment 4(b)-1: “the regulation’s protections apply only to persons who have requested or received an extension of credit,” but extending these protections to prospective applicants is “in keeping with the purpose of the Act – to promote the availability of credit on a nondiscriminatory basis.”

[2] For example, the Interagency Fair Lending Examination Procedures identify the following as “indicators of potential disparate treatment”: advertising only in media serving nonminority areas, using marketing programs or procedures for residential loan products that exclude one or more regions or geographies that have significantly higher percentages of minority group residents than does the remainder of the assessment or marketing area, and using mailing or other distribution lists or other marketing techniques for prescreened or other offerings of residential loan products that explicitly exclude groups of prospective borrowers or exclude geographies that have significantly higher percentages of minority group residents than does the remainder of the marketing area.

CFPB Issues Warning to Mortgage Servicing Industry

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A&B ABstract: On April 1, 2021, the Consumer Financial Protection Bureau (“CFPB” or “Bureau”) issued a Compliance Bulletin and Policy Guidance (the “Bulletin”) on the Bureau’s supervision and enforcement priorities with regard to housing insecurity in light of heightened risks to consumers needing loss mitigation assistance once COVID-19 foreclosure moratoriums and forbearances end.  The Bulletin warns mortgage servicers to begin taking appropriate steps now to prevent “a wave of avoidable foreclosures” once borrowers begin exiting COVID-19 forbearance plans later this Fall, and also highlights the areas on which the CFPB will focus in assessing a mortgage servicer’s compliance with applicable consumer financial laws and regulations.

The Bulletin

The Bulletin warns mortgage servicers of the Bureau’s “commit[ment] to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act” to ensure borrowers impacted by the COVID-19 pandemic “receive the benefits of critical legal protections and that avoidable foreclosures are avoided.”

Specifically, the Bureau highlighted two populations of borrowers as being at heightened risk of referral to foreclosure following the expiration of the foreclosure moratoriums if they do not resolve their delinquency or enter into a loss mitigation option, namely, borrowers in a COVID-19-related forbearance and delinquent borrowers who are not in forbearance programs.

As consumers near the end of their forbearance plans, the CFPB expects “an extraordinarily high volume of loans needing loss mitigation assistance at relatively the same time.” The Bureau specifically expressed its concern that some borrowers may not receive effective communication from their servicers and that some borrowers may be at an increased risk of not having their loss mitigation applications adequately processed. To that end, the Bureau plans to monitor servicer engagement with borrowers “at all stages in the process” and prioritize its oversight of mortgage servicers in deploying its enforcement and supervision resources over the next year.

Servicers are expected to plan for the anticipated increase in loans exiting forbearance programs and related loss mitigation applications, as well as applications from borrowers who are delinquent but not in forbearance. Specifically, the Bureau expects servicers to devote sufficient resources and staff to ensure they are able to clearly communicate with affected borrowers and effectively manage borrower requests for assistance in order to reduce foreclosures. To that end, the Bureau intends to assess servicers’ overall effectiveness in assisting consumers to manage loss mitigation, and other relevant factors, in using its discretion to address potential violations of Federal consumer financial law.

In light of the foregoing, the Bureau plans to focus its attention on how well servicers are:

  • Being proactive. Servicers should contact borrowers in forbearance before the end of the forbearance period, so they have time to apply for help.
  • Working with borrowers. Servicers should work to ensure borrowers have all necessary information and should help borrowers in obtaining documents and other information needed to evaluate the borrowers for assistance.
  • Addressing language access. The CFPB will look carefully at how servicers manage communications with borrowers with limited English proficiency (LEP) and maintain compliance with the Equal Credit Opportunity Act (ECOA) and other laws. It is worth noting that the Bureau issued a notice in January 2021 encouraging financial institutions to better serve LEP borrowers in a language other than English and providing key considerations and guidelines.
  • Evaluating income fairly. Where servicers use income in determining eligibility for loss mitigation options, servicers should evaluate borrowers’ income from public assistance, child-support, alimony or other sources in accordance with the ECOA’s anti-discrimination protections.
  • Handling inquiries promptly. The CFPB will closely examine servicer conduct where hold times are longer than industry averages.
  • Preventing avoidable foreclosures. The CFPB will expect servicers to comply with foreclosure restrictions in Regulation X and other federal and state restrictions in order to ensure that all homeowners have an opportunity to save their homes before foreclosure is initiated.

Takeaway

As more and more borrowers begin to near the end of their COVID-19-related forbearance plans, and as applicable foreclosure moratoriums near their anticipated expiration dates, mortgage servicers should consider evaluating their mortgage servicing operations, including applicable policies, procedures, controls, staffing and other resources, to ensure impacted loans are handled in accordance with applicable Federal and state servicing laws and regulations.