Alston & Bird Consumer Finance Blog

DOJ

Strike Force on Unfair and Illegal Pricing Holds First Public Meeting: CFPB Director Highlights Work on Junk Fees

What Happened?

As reported by Alston & Bird’s Antitrust Group, the Federal Trade Commission and the Department of Justice hosted the first public meeting of the Strike Force on Unfair and Illegal Pricing (the “Strike Force”).  President Biden announced the Strike Force’s formation in March 2024 to strengthen interagency efforts to root out and stop illegal corporate behavior that burdens American families through anticompetitive, unfair, deceptive, or fraudulent practices.  Officials from several agencies, including the CFPB, highlighted their work to lower prices across multiple industries for Americans.

Why Does it Matter?

With regards to the CFPB, Director Chopra highlighted some of its work on cracking down on so-called “junk fees,” many of which we have previously highlighted here, here, and here.

The CFPB has been prolific on its junk fee initiative, issuing 14 press releases, 10 blog posts, three enforcement actions, promulgating rules, commissioning eight reports, as well as issuing Advisory Opinions, Circulars and videos. In its prepared remarks at the Strike Force meeting, the CFPB Director outlined the Bureau’s work on junk fees imposed by companies that process payments, in this case for children’s school lunches. In his recent remarks, Director Chopra makes clear, the agency is not stopping and forecasted that:

  • The CFPB is looking at the costs for credit reports and credit scores and using existing laws to ensure that fees for such credit products are “fair and reasonable.”
  • The Bureau is “closely scrutinizing all aspects of the credit card market.”
  • The CFPB is “investigating the role of not just individual executives, but also the investors, like private equity funds, that call the shots.” According to Director Chopra, such controlling investor or other investment vehicle could be subject to direct liability if they are “calling the shots.”

What Do I Need to Do?

Companies subject to CFPB supervision should consult with consumer protection and antitrust counsel to make sure they are not inadvertently engaging in anticompetitive, deceptive, unfair or fraudulent practices, when setting pricing or when imposing, adding, or changing fees.

Companies should also evaluate their pricing and fee practices to ensure they are making independent decisions for setting prices.

When changing pricing or adding fees, companies should look closely at the CFPB’s priorities, which is wide and deep and includes fees in mortgage origination, mortgage servicing, credit cards, and payment processors, among others.

As Economic Winds Blow, So Do Whistleblowers: How to Protect Your Company Through Turbulent Times

A&B ABstract:

As recently reported by the Financial Times, banks are preparing for the “deepest job cuts since the financial crisis,” with firings to be “super brutal.” Already, nonbank lenders and service providers have been suffering with several rounds of layoffs and, potentially, more to come. Former employees, particularly disgruntled ones, may have information they want to share with the government.  An Insider article highlighted that remote work has resulted in a surge of whistleblower complaints.  If true, even current employees, including those whose complaints or grievances fall on deaf ears, also could be potential whistleblowers.

Alston & Bird Partners Nanci Weissgold, Joey Burby, and Cara Peterman (ably assisted by, and a special thanks to, Charlotte BohnAndrew Brown, and Melissa Malpass) addressed today’s challenging economic conditions, and how companies can protect themselves during an expected surge in whistleblowing by disgruntled current and former employees.  The webinar slides address:

  • What you need to know about government whistleblower reward programs and laws with whistleblower incentives and protections, including the False Claims Act, FIRREA, and the SEC’s Whistleblower program.
  • Recent trends, developments, major settlements, and awards in whistleblower-related settlements and litigation.
  • Best practices for companies when responding to, de-escalating, and defending against whistleblower complaints.

Best Practices for Responding to Whistleblower Complaints

#1: Keep complaints internal. It is critical to have procedures in place for employees (as well as contractors and other agents) to report compliance concerns internally.

  • Establish a compliance hotline or other means of anonymous
  • Have an anti-retaliation policy to protect employees who make a report.
  • Promote these policies and procedures, and train employees on them.

This is a required element of an effective compliance program under DOJ and SEC guidance, and factors into their charging decisions; also considered under U.S. Sentencing Guidelines in determining corporate penalties.

Additionally, internal complaints allow companies to investigate and remediate (if necessary) and to consider whether/how to self-disclose. The 2023 revisions to DOJ’s Corporate Enforcement Policy strongly encourage self-disclosure, offering significant incentives to companies who do.

#2: Maintain a strong Compliance Management System (CMS). A strong CMS is one that establishes compliance responsibilities, communicates those responsibilities to employees, ensures the responsibilities are carried out and met, takes corrective action, and updates tools, systems, and processes as needed.

Scaled to the size of the company’s operations, a CMS requires:

  • A strong board of directors and management oversight – “tone at the top.”
  • Comprehensive written policies and procedures to demonstrate an understanding of all applicable laws and regulations.
  • Training of all applicable laws to ensure that employees can perform their functions.
  • Monitoring and testing based on an assessment of risk carried out through three lines of defense:
    (1) functions that own and manage risk; (2) functions that oversee risk; and (3) functions that provide independent assurance.
  • Timely corrective action that remediates past issues and prevents reoccurrence prospectively.
  • Consumer complaint response, root cause analysis, and enterprise-wide action.

#3:  Time is of the essence. Whether you learn of a whistleblower complaint internally, or via contact from a government agency, you should initiate an internal investigation into the subject matter of the complaint immediately. DOJ takes the immediacy of self-disclosure into account in determining whether to file charges. If there is ongoing problematic conduct, you want to stop it and cut off potential liability.

  • What the investigation will involve, and how it will be conducted, will vary depending on the seriousness of the complaint and how credible it appears.
  • Inside or outside counsel should generally conduct the investigation to ensure communications and work product are protected by the attorney-client privilege.
  • Some basic steps are common to almost every internal investigation:
    • Ensure that all potentially relevant documents (including emails and IMs) are preserved.
    • Collect and review relevant documents.
    • Interview involved employees (using Upjohn warning).

Takeaway

Given that a surge in whistleblower complaints is likely, financial institutions should ensure that they are adequately prepared to address them.

Is the DOJ (De Facto) Enforcing the Community Reinvestment Act?

A&B Abstract:

Furthering the Justice Department’s Combating Redlining Initiative, the Department of Justice has announced another redlining settlement.  But this settlement is different – this one involves a bank that has received top marks by its prudential regulator, the Federal Deposit Insurance Corporation (FDIC), for its compliance with the Community Reinvestment Act (CRA), a statute enacted to reduce redlining, for the same years that the DOJ alleged the bank engaged in redlining.

The DOJ’s Allegations

Lakeland Bank is a northern New Jersey-based, state chartered bank with more than $10 billion in assets.  The DOJ alleged violations of the Fair Housing Act and Equal Credit Opportunity Act (ECOA)/Regulation B, and specifically “that Lakeland engaged in illegal redlining by avoiding providing home loans and other mortgage services, and engaged in discrimination and conduct that would discourage mortgage applications from prospective applicants who are residents of or seeking credit in majority Black and Hispanic census tracts” located in its northern New Jersey assessment area.  In entering the more than $13 million settlement, the Bank did not admit to any of the DOJ’s allegations.  It agreed to various requirements to strengthen its fair lending compliance program, including investing in a loan subsidy fund, opening additional branches, and expanding its CRA assessment area.

The FDIC’s Findings

What is curious, however, is that in its latest CRA performance evaluation, the FDIC determined that Lakeland “exhibits a good record of serving the credit needs of the most economically disadvantaged areas of its assessment area, low-income individuals, and/or very small businesses, consistent with safe and sound banking practices.”  It determined that there is in fact strong competition for lending in the area, but that the bank nonetheless showed good penetration to borrowers of low- and moderate-income levels and in low- and moderate-income areas.  Further, the FDIC determined that the bank “makes extensive use of innovative and/or flexible lending practices in order to serve assessment area credit needs,” noting that the bank’s programs provide lower down payments, lower interest rates, down payment assistance, first-time homebuyer programs, and unsecured small dollar loan programs, for lower-income individuals and small businesses.  The FDIC also called Lakeland “a leader in making community development loans.”  In fact, Lakeland received a rating of “Outstanding,” the highest rating which only a small number of banks achieve, in each of its CRA exams for more than a decade.

CRA versus Fair Lending Laws

The rub is that the CRA is not a fair lending statute, as it focuses on income disparity and not racial disparity, though it often goes hand in glove with the fair lending laws.  For example, a failure to comply with fair lending laws (e.g., the Fair Housing Act, ECOA/Regulation B) can result in a downgrade of a bank’s CRA rating, despite its satisfactory or better performance in its CRA evaluation.  The CRA is enforced by the OCC, FDIC, and Federal Reserve Board.  The fair lending laws are typically enforced by the OCC, FDIC, Federal Reserve, CFPB, NCUA, FTC, and HUD (along with state regulators).  The threshold for an agency’s referral to DOJ for enforcement proceedings is low, requiring reason to believe there is a pattern or practice of discrimination.

Takeaway

In practice, the Lakeland settlement shows how a bank can be susceptible to fair lending risk with respect to redlining, and yet still pass its (anti-redlining) CRA examination with flying colors.  Maybe that is a reason to revise the CRA regulations (spoiler alert: that’s already in the works).  Or maybe it is a reminder to banks to mind the forest and the trees.  Focusing on CRA is necessary but not sufficient, and a bank needs to ensure it is regularly monitoring its lending activity for potential redlining.

CFPB and DOJ Announce Redlining Settlement Against Non-Bank Mortgage Lender

A&B Abstract:

On July 27, 2022, the Consumer Financial Protection Bureau (“CFPB”) and the US Department of Justice (“DOJ”) entered into a settlement with Trident Mortgage Company (“Trident”), resolving allegations under the Equal Credit Opportunity Act (“ECOA”) and the Fair Housing Act that the non-bank mortgage lender intentionally discriminated against majority-minority neighborhoods in the greater Philadelphia area. This settlement is the first redlining enforcement action against a non-bank mortgage lender and evidences the government’s continued focus on “modern-day redlining.”

The Settlement Terms

The Trident settlement, which requires the lender to pay over $22 million, resolves allegations that Trident, through its marketing, sales, and hiring actions, “discouraged” prospective applicants in the greater Philadelphia area’s majority-minority neighborhoods from applying for mortgage and refinance loans. However, much like the CFPB’s lawsuit against Townstone Financial, Inc. (“Townstone”), the settlement does not indicate that Trident treated neighborhoods or applicants differently based on race or ethnicity. Instead, the crux of the settlement is that Trident did not take sufficient affirmative action to target majority-minority neighborhoods. This, coupled with Trident’s mortgage lending reporting under the Home Mortgage Disclosure Act (“HMDA”), ultimately subjected the lender to enforcement.

Specifically, the CFPB’s press release notes that: (1) only 12% of Trident’s mortgage loan applications came from majority-minority neighborhoods, even though “more than a quarter” of neighborhoods in the Philadelphia MSA are majority-minority; (2) 51 out of Trident’s 53 offices in the Philadelphia area were located in majority-white neighborhoods; and (3) all models displayed in Trident’s direct mail marketing campaigns “appeared to be white;” (4) Trident’s open house flyers were “overwhelmingly concentrated” in majority-white neighborhoods; and (5) Trident’s online advertisements appeared to be for home listings “overwhelmingly located” in majority-white neighborhoods.

Similar to the Townstone lawsuit, the settlement does not indicate that Trident explicitly excluded certain neighborhoods or prospective applicants or actually discouraged applicants from majority-minority neighborhoods, only that such applicants “would have been discouraged.” While both the Townstone lawsuit and the Trident settlement reference remarks made by employees in their internal communications, there is no indication that employees ever made offensive or discouraging statements to prospective applicants of any neighborhood. Nevertheless, the CFPB settlement requires Trident to pay $18.4 million into a loan subsidy program to increase the credit extended in majority-minority neighborhoods in the Philadelphia MSA; $4 million in civil money penalties; $875,000 toward advertising in majority-minority neighborhoods in the Philadelphia MSA; $750,000 toward partnerships with community-based organizations; and $375,000 toward consumer financial education. The settlement also requires Trident to open and maintain four (4) branch offices in majority-minority neighborhoods of the MSA.

Takeaways

The Trident settlement is noteworthy for various reasons. In addition to being the first government redlining settlement with a non-bank mortgage lender, the resolution involves a variety of parties, including the CFPB, DOJ, and the states of Pennsylvania, New Jersey, and Delaware. Further, the settlement once again highlights that insufficient marketing and outreach in minority neighborhoods may be considered sufficient  actionable under ECOA and the Fair Housing Act. Indeed, it appears that a lender’s failure to precisely align its lending patterns with the geography’s demographics may serve as the basis of a redlining claim, even absent specific allegations of intentional exclusion or other discrimination. Finally, the settlement demonstrates that even a lender no longer in operation (Trident stopped accepting loan applications in 2021) is still a worthy defendant in the government’s eyes.

Modern-Day Redlining Enforcement: A New Baseline

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 multimilliondollar 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.