How will fair banking fare?

The New Year rang in with new questions for the financial services industry. Many wonder if leadership changes at the federal banking agencies will change their focus. What will happen to rulemaking initiatives, such as the new Home Mortgage Disclosure Act (HMDA) rule and small business data collection? Expect 2018 to provide some new twists and turns on the path to fair-lending compliance.

Leadership changes

The leadership turnover will have the most significant impact on fair and responsible banking in 2018. Richard Cordray stepped down as director of the Consumer Financial Protection Bureau, and Mick Mulvaney was appointed acting director. Joseph Otting has been sworn in as Comptroller of the Currency. Jerome Powell, a member of the Board of Governors, has replaced Janet Yellen as Federal Reserve chairman. Jelena McWilliams has been nominated to head FDIC. How will this turnover change agencies’ approach to supervision, regulation, and enforcement?

First, expect an increased focus on efficiency and easing of regulatory burden.

For example, Mulvaney has already ordered a review of CFPB’s policies and priorities; implemented revisions to the payday lending rule; and announced a review of the new HMDA rule, including transactional and institutional coverage, and the collection of data points not mandated by law.

Similarly, at the Fed, Powell has said he would consider appropriate ways to ease banks’ regulatory obligations while preserving key elements of 2010’s Dodd-Frank Act, such as stress tests and capital requirements.

Comptroller Otting stated that he looks forward to reducing unnecessary rules. In a Senate hearing, McWilliams said she would focus FDIC’s work on easing regulatory requirements for community banks, and noted that regulators should not shrink from their responsibilities to evaluate the impact of rules, including their costs.

CFPB’s new strategic plan, released in February, is a prime example of this. For 2018 through 2022, the bureau set three goals: ensure that all consumers have access to markets for financial products and services; implement and enforce the law consistently to ensure that markets for consumer financial products and services are fair, transparent, and competitive; and foster operational excellence through efficient and effective processes, governance, and security of resources and information.

A few changes are clear from comparing the 2018 strategy with the 2013 plan.

First, the mission statement has changed. The 2013 plan: “The CFPB is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives.”

By contrast, the 2018 mission statement comes directly from Dodd-Frank: “to regulate the offering and provision of consumer financial products or services under the federal consumer financial laws and to educate and empower consumers to make better informed financial decisions.”

Similarly, the goals and supporting objectives have changed. Most are now tied directly to Dodd-Frank, such as ensuring consumer access to markets for financial goods and services, and consistently enforcing federal consumer financial law with respect to both banks and nonbanks. Other goals and objectives are focused on operational excellence, including cybersecurity, efficiency, and internal accountability.

Fair access still priority

Many observers expect consumer protection and fair access to credit to remain priorities, although the federal focus may shift from enforcement to more traditional supervision activity in many cases.

Turnover at the top will bring more focus on efficiency and reg burden. Clockwise from top left: Jerome Powell, new Fed chairman; Joseph Otting, new Comptroller of the Currency; Jelena McWilliams, nominated to head FDIC; and Mick Mulvaney, CFPB acting director.

Comptroller Otting has emphasized the key role banks play in providing access to capital for economic growth and supported bank small-dollar lending, but he also has expressed concern over diminishing branch networks and the potential impact on access to banking by minorities and lower-income consumers.

Although Mulvaney has criticized CFPB’s previous leaders for “pushing the envelope” on consumer protection enforcement, he has noted that he does not intend to shut down the bureau and plans to faithfully execute the law. Mulvaney also stated that the bureau will continue to pursue fair-lending enforcement and supervision cases, but that preenforcement analyses would be more quantitatively rigorous, with agency priorities driven by complaint data.

On the other hand, CFPB recently announced that the Office of Fair Lending and Equal Opportunity is moving from the Division of Supervision, Enforcement, and Fair Lending to the Office of Equal Opportunity and Fairness. Fair-lending supervision and enforcement responsibilities will remain with the division. In the future, the Office of Fair Lending and Equal Opportunity is expected to focus on advocacy, coordination, and education.

Changing federal activity would not mean the end of public fair-lending disputes.

Numerous state attorneys general have said they will fight any attempt to weaken consumer protection and suggested their enforcement activity will increase if CFPB’s declines. In addition, advocacy groups and the plaintiffs’ bar are likely to become more active if federal enforcement activities decline.

The banking agencies’ examination staffs will continue to assess compliance with consumer protection laws, including the Equal Credit Opportunity Act and the Fair Housing Act. The U.S. Department of Housing and Urban Development will continue to play a role, especially through its complaint processes.

HMDA revisions

Regardless of agency leadership, the new HMDA rule will have a significant impact on lenders and will give insight into what to expect from rulemaking on small business lending data collection. Even if CFPB delays enforcement activity based on data reporting under the rule, fair-lending examinations will begin to incorporate the additional data fields, resulting in increasing regulatory risk. HMDA data reported for 2018 will contain many more of the key factors used in underwriting and pricing, which will allow regulators to model fair-lending risk much more precisely.

When the new data is released to the public in 2019, reputational and litigation risks will increase as advocacy groups, law firms, and the media analyze it. The richer data set will permit focus on pricing components, such as fees and lender credits that were previously available only to regulators. It will be much easier to compare an institution’s performance by originator, branch, and channel.

In preparation, lenders must incorporate the new data into their fair-lending monitoring and testing. As lenders collect the new data for HMDA-reportable loans, they should assess how changes in transactional coverage will affect their fair-lending and Community Reinvestment Act analytics.

For example, inclusion of home equity lines of credit may change the apparent lending distribution if HELOC clientele demographics differ from those of traditional mortgage borrowers. Lenders offering both closed-end mortgage loans and HELOCs should use the expanded data to test for steering risk between the two product classes.

Additional questions include:

• How are the new or modified HMDA fields likely to affect lenders’ existing fair-lending analytics or regulatory fair-lending screening?

• How should institutions incorporate the new or disaggregated race, ethnicity, and gender fields into fair-lending monitoring and testing?

• How should lenders evaluate changes in their apparent fair-lending performance in light of the changes in institution and transaction coverage and data fields?

• How should changes to HMDA data collection and fair-lending analytics be risk-rated, prioritized, and incorporated into fair-lending risk assessments?

• How does the new monitoring impact reporting to management and the board?

Once the expanded data is available, lenders then should use it to enhance peer comparisons, marketing analyses, redlining analyses, and reverse redlining analyses.

Finally, what about HMDA data integrity? The increase in the number of fields magnifies the regulatory risk inherent in HMDA loan application register submissions. As a result, the effort required to collect and report accurate data also must increase. This is especially true for HELOC data and any other new/modified fields, which have not been subject to mandatory HMDA reporting and rigorous data quality testing in the past.

Fair-servicing scrutiny

Expect the focus on loan servicing to continue. On the mortgage front, regulators will continue to expect servicers to maintain robust systems, enabling fair and timely evaluation of, and assistance to, distressed borrowers. Concerns highlighted by CFPB in 2017 may receive continued attention, including reasonable due diligence in getting borrowers to complete loss mitigation applications; avoiding overly broad waivers of rights clauses in loss mitigation programs; and ensuring that the mortgage periodic statements contain all the required data and disclosures.

The loan servicing focus that began with mortgages has already spread to student loans. In 2017, CFPB continued examination, reporting, and enforcement activity related to servicing student loans, especially private ones.

Going forward, lenders should expect the fair-servicing principles established for mortgages and student loans to be applied more broadly. In addition to mortgages and student loans, servicing issues highlighted by the CFPB in 2017 affected several other products, including:

• Auto loans, including repossessions.

• Credit cards, including payment processing, collections, and error resolutions.

• Deposit accounts, including overdraft protection products, Regulation E error resolution, and the “freezing” of transaction accounts.

Financial institutions’ compliance monitoring and testing should include servicing, especially of significant and higher-risk products.

In addition, Mulvaney indicated that the bureau’s focus on debt collection will continue. One recent focus involves borrower communications during collections. CFPB identified several concerns, which include:

• Communicating with unauthorized persons regarding debts.

• Contacting borrowers at inconvenient times or places.

• Misstating the effect of the debt payments and the debt settlements on borrower credit scores.

The bureau also noted instances of creditors attempting to collect from authorized users and making unauthorized ACH debits for accounts in collection. Lenders and debt collectors should evaluate their processes and controls, including call monitoring, to ensure that debt collection efforts are fair and appropriate.

Further, lenders using third-party debt collectors should ensure that the outside provider adheres to the requirements for fair and responsible collection activities. Lenders are responsible for the actions that service providers take on their behalf.

Risk management technology

Especially for larger institutions and those engaging in fintech-enabled lending, changes in risk management technology will have a significant impact.

Big data brings big challenges from a fair-lending standpoint. As the number and complexity of credit and pricing models and segmentations increase, so does the need for more robust fair-lending statistical analysis of the risk inherent in the development and use of such models.

Additionally, regulatory expectations for statistical analysis appear to be increasing. As a result, banks should evaluate the quality of their fair-lending models; ensure appropriate validation of credit risk and pricing models that includes consideration of fair-lending concerns; and include fair-lending models within the coverage of their model risk management programs.

Although some things may change under the Trump administration, banks should expect a continued focus on robust compliance management systems, including fair lending, data integrity, regulatory reporting, loan servicing, and third-party oversight. Having a strong control framework will help manage risks in spite of shifting regulatory expectations and requirements. Institutions should examine their CMS for adequacy in light of their product mix, risk appetite, and the changing regulatory environment.

About the authors

Rebecca (Lynn) Woosley, CRCM, Engagement Director with Treliant, has extensive senior executive experience in regulatory compliance, consumer protection, consumer and commercial credit risk, credit and compliance risk modeling, model governance, regulatory change management, acquisition due diligence, and operational risk. Over the last two decades, Woosley has held leadership positions within the enterprise risk management division of a Top 10 bank. She has also served as Senior Examiner and Economist at the Federal Reserve Bank of Atlanta. [email protected]

Brenda Baylor, CRCM, Director with Treliant, has 22 years of experience in regulatory compliance, risk management, and banking. Her specialties include fair-lending laws and regulations, CRA, HMDA, and Unfair, Deceptive, or Abusive Acts or Practices (UDAAP). Baylor advises clients on the implementation of regulatory compliance programs, risk assessments, monitoring, and statistical analytics programs, as well as examination readiness and risk management strategies. [email protected]