Legal Alert

Mortgage Banking Update - June 30, 2022

June 30, 2022
In This Issue:


Justice Department Announces Settlement With Meta (formerly Facebook) to Resolve Alleged FHA Violations Arising From Meta’s Targeted Advertising System

The Department of Justice announced that it has entered into a settlement with Meta Platforms Inc., formerly known as Facebook Inc., to resolve allegations that Meta engaged in discriminatory advertising in violation of the Fair Housing Act (FHA). The proposed agreement was filed in a New York federal district court simultaneously with a complaint alleging that Facebook’s housing advertising system discriminated against Facebook users based on their race, color, religion, sex, disability, familial status, and national origin. The settlement highlights the need for companies to be mindful of fair lending risk when formulating their social media and other advertising plans.

The lawsuit arose from an administrative complaint filed in 2018 by the Assistant Secretary for Fair Housing and Equal Opportunity with HUD alleging FHA violations by Facebook.  After the Secretary issued a Charge of Discrimination under the FHA, Facebook elected to have the Charge decided in a federal district court.  The complaint references Facebook’s 2019 settlement of a lawsuit filed by the National Fair Housing Alliance and several other consumer advocacy groups challenging Facebook’s advertising practices.  In the settlement, Facebook agreed to remove age, gender, and zip code targeting for housing, employment, and credit-related advertisements.  The DOJ alleges that the changes made by Facebook were insufficient to stop discriminatory ad targeting.

The complaint alleges that Facebook engaged in discrimination in violation of the FHA through the following three aspects of the ad delivery system that it designed and offered to advertisers:

  • Trait-based targeting. This involved encouraging advertisers to target ads by including or excluding Facebook users based on FHA-protected characteristics that Facebook, through its data collection and analysis, attributed to those users.
  • Look-alike targeting. This involved a machine-learning algorithm that advertisers could use to find Facebook users who “look like” an advertiser’s source audience (i.e. an advertisers identified audience of Facebook users) based in part upon FHA-protected characteristics.
  • Delivery determinations. This involved applying machine-learning algorithms to help determine which subset of an advertiser’s target audience would actually receive the ad based in part upon FHA-protected characteristics.

The complaint sets forth in great detail the alleged steps Facebook took in implementing each of these aspects of its ad delivery system. The DOJ alleges that through its design and use of these aspects of its ad delivery system, Facebook engaged in both intentional discrimination based upon FHA-protected characteristics and conduct that had a disparate impact on the basis of FHA-protected characteristics.  It claims that Facebook’s alleged actions, policies, and practices constitute (1) making dwellings unavailable to persons because of FHA-protected characteristics in violation of the FHA, (2) making, printing, or publishing advertisements with respect to the sale or rental of dwellings that indicate a preference, limitation, or discrimination based on FHA-protected characteristics in violation of the FHA, and (3) representing to a person because of a FHA-protected characteristic that a dwelling is not available for inspection, sale, or rental when such dwelling is in fact available in violation of the FHA.

The settlement agreement includes the following terms:

  • By December 31, 2022, Meta must stop using the “look-alike” advertising tool for determining which Facebook users are eligible to receive housing ads.
  • By December 16, 2022, Meta must develop a new system for housing ads to address disparities for race, ethnicity, and sex between advertisers’ targeted audiences and the group of Facebook users to whom Facebook’s personalization algorithms actually deliver the ads.  If the parties agree that the new system sufficiently addresses the disparities, Meta will fully implement the new system by December 31, 2022.  If the parties do not agree, the settlement agreement will terminate and the parties will be returned to the legal positions they occupied before the agreement’s effective date.
  • If the new system is implemented, the parties will select an independent, third-party reviewer to verify on an ongoing basis whether the new system is meeting the compliance standards agreed to by the parties.  Meta must provide the reviewer with any information necessary to verify compliance with those standards.  The court will have ultimate authority to resolve disputes over the information that Meta must disclose.
  • Meta will not provide any targeting options for housing advertisers that directly describe or relate to FHA-protected characteristics and must notify the DOJ if it intends to add any targeting options.  If the parties cannot agree on whether a targeting option satisfies the standards set forth in the agreement, Meta cannot add the option without court approval.
  • Meta must pay a civil penalty of $115,054, which the DOJ calls “the maximum penalty available under the [FHA].”

While this case did not involve the CFPB, under Director Chopra’s leadership the CFPB has issued a series of orders to Big Tech companies, including Facebook, seeking information about their use of consumer payments data, including any use for behavioral targeting.  Also, under Director Chopra’s leadership, the CFPB has regularly been sounding alarms about the potential for discrimination arising from the use of so-called “black box” credit models that use algorithms or other artificial intelligence tools.  In May 2022, the CFPB issued a Circular addressing  ECOA adverse action notice requirements in connection with credit decisions based on algorithms.  In February 2022, the CFPB issued an outline entitled Small Business Advisory Review Panel for Automated Valuation Model (AVM) Rulemaking.  In the outline, the CFPB specifically focused on the potential for algorithmic bias arising from AVMs.

John L. Culhane, Jr. & Richard J. Andreano, Jr.

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FTC Seeks Public Input on Updates to 2013 Guide on Making Effective Disclosures in Digital Advertising

The FTC has announced that it is seeking public input on ways to modernize its 2013 guide titled “.com Disclosures:  How to Make Effective Disclosures in Digital Advertising,” which provides guidance to businesses on digital advertising and marketing.  In an attempt to modernize the guidance, the FTC is seeking comments on the following issues:

  • the use of sponsored and promoted advertising on social media;
  • advertising embedded in games and virtual reality and microtargeted advertisements;
  • the ubiquitous use of dark patterns, manipulative user interface designs used on websites and mobile apps, and in digital advertising that pose unique risks to consumers;
  • whether the current guidance adequately addresses advertising on mobile devices;
  • whether additional guidance is needed to reflect the multi-party selling arrangements involved in online commerce and affiliate marketing arrangements;
  • how the guidance on the use of hyperlinks can be strengthened to better protect consumers; and
  • the adequacy of online disclosures when consumers must navigate multiple webpages;

The FTC is accepting comments through August 2, 2022.

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FinCEN Warns Against Elder Financial Exploitation

On June 15, FinCEN issued an Advisory on Elder Financial Exploitation (“Advisory”) to warn financial institutions about the rising trend of elder financial exploitation (“EFE”), which FinCEN defines as “the illegal or improper use of an older adult’s funds, property, or assets, and is often perpetrated either through theft or scams.” The Advisory is detailed. It highlights new EFE typologies and potential red flags and builds upon a related advisory issued in 2011. It also offers tips on Suspicious Activity Report (“SAR”) filings and describes other resources available to fight EFE.


According to the Advisory, older adults – defined by FinCEN as anyone 60 years or older – are targets for financial exploitation due to their income and accumulated life-long savings, in addition to the possibility that they may face declining cognitive or physical abilities, isolation from family and friends, lack of familiarity or comfort with technology, and reliance on others.  All of these risks have been exacerbated by the COVID-19 pandemic. The Advisory states that although EFE is the most common form of elder abuse, the majority of incidents go unidentified and unreported because victims may choose not to come forward out of fear, embarrassment, or lack of resources. 

The Advisory provides some statistics on the pervasiveness of EFE and notes that financial institutions filed 72,000 SARs related to EFE in 2021 – an increase of 10,000 SARs over filings in 2020. Further, the Consumer Financial Protection Bureau estimates that the dollar value of suspicious transactions linked to EFE has increased from $2.6 billion in 2019 to $3.4 billion in 2020.  Similarly, the Federal Trade Commission reports that older adults account for 35 percent of the victims associated with filed fraud reports when a consumer has provided an age.

Theft and Scams

The Advisory divides EFE schemes into two basic types: thefts and scams. 

Elder thefts are typically committed by known and trusted persons of older adults, such as family members and non-family caregivers who abuse their relationship and position of trust, or neighbors, friends, financial services providers, other business associates, or those in routine close proximity to the victims. According to the Advisory:

  • Instances of elder theft often follow a similar methodology in which trusted persons may use deception, intimidation, and coercion against older adults in order to access, control, and misuse their finances.
  • Criminals frequently exploit victims’ reliance on support and services and will take advantage of any cognitive and physical disabilities, or environmental factors such as social isolation, to establish control over the victims’ accounts, assets, or identity. This can take many forms, including the exploitation of legal guardianships and power of attorney arrangements, or the use of fraudulent investments such as Ponzi schemes to defraud older adults of their income and retirement savings.
  • These relationships enable trusted persons to repeatedly abuse the victims by liquidating savings and retirement accounts, stealing Social Security benefit checks and other income, transferring property and other assets, or maxing out credit cards in the name of the victims until most of their assets are stolen.

On the other hand, elder scams typically involve fraudsters with no known relationship to their victims and often located outside of the United States who lure victims into sending payments and disclosing personal identifying information (“PII”) under false pretenses or for a promised benefit or good the victims will never receive.  Scammers will contact older adults under a fictitious persona via phone call, robocall, text message, email, mail, in-person communication, online dating apps and websites, or social media platforms. In order to appear legitimate and establish trust, scammers commonly impersonate government officials, law enforcement agencies, technical and customer support representatives, social media connections, or family, friends, and other trusted persons. They often will create high-pressure situations and then request victims to make payments through wire transfers at money services businesses, prepaid access cards, gift cards, money orders, tracked delivery of cash through the U.S. Postal Service, ATM deposits, cash pick-up at the victims’ houses, and virtual currency

Even worse, an elder scam victim can serve as a “money mule”: the scammer convinces the victim to set up a bank account or limited liability corporation in the victim’s own name to receive, withdraw, deposit, or transfer multiple third-party payments from other victimized older adults to accounts controlled by the scammer under the illusion of a “business opportunity.”

The Advisory identifies five common typologies of elder scams:  government imposter scams; romance scams; emergency/person-in-need scams; lottery and sweepstakes scams; and tech and customer support scams. 

Red Flags

The Advisory identifies 12 “behavioral” and 12 “financial” red flags to help financial institutions detect, prevent, and report suspicious activity connected to EFE. An example of a “behavioral” red flag is when an “older customer’s account shows sudden and unusual changes in contact information or new connections to emails, phone numbers, or /accounts that may originate overseas.”  An example of a “financial” red flag is when “dormant accounts with large balances begin to show constant withdrawals.”

The Advisory explains that because “no single red flag is determinative of illicit or suspicious activity, financial institutions should consider the surrounding facts and circumstances, such as a customer’s historical financial activity, whether the transactions are in line with prevailing business practices, and whether the customer exhibits multiple red flags, before determining if a behavior or transaction is suspicious or otherwise indicative of EFE.” Further, and consistent with a risk-based approach to compliance with the Bank Secrecy Act, FinCEN encourages financial institutions to perform additional due diligence where appropriate.

SARs and Other Outreach to Combat EFE

The Advisory provides that SARs filed on suspected EFE schemes should reference the Advisory and mark the check box for Elder Financial Exploitation in SAR Field 38(d). The Advisory also offers non-regulatory tips for writing SARs, such as:

  • Provide details about the reporting entity’s response, e.g., whether accounts were closed, whether the person was warned that transactions appear to involve fraud, if the person was not permitted to conduct new transactions, etc.
  • Reference supporting documentation, including any photos or video footage, in the narrative.
  • Cross-report the circumstances leading to the filing of EFE SARs directly to local law enforcement if there is any indication that a) a crime may have been committed and/or b) the older adult may still be at risk for victimization by the suspected abuser.

Beyond filing SARs, FinCEN also recommends that financial institutions refer customers who may be victims of EFE to the Department of Justice’s National Elder Fraud Hotline for assistance with reporting suspected fraud to the appropriate government agencies.  The Advisory observes that financial institutions may be required under state law to report suspected EFE to law enforcement and/or Adult Protective Services.  Finally, financial institutions may share information with each other under Section 314(b) of the Patriot Act, and may turn to FinCEN’s Rapid Response Program, which seeks to help victims and their financial institutions recover funds stolen due to certain cyber-enabled financial crime schemes, including cyber-enabled EFE.

Peter D. Hardy

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California DFPI Issues Proposed Regulations on Consumer Complaints and Inquiries

The California Department of Financial Protection and Innovation (DFPI) has issued proposed regulations to implement provisions of the California Consumer Financial Protection Law (CCFPL) pertaining to consumer complaints and inquiries. Comments are due by July 5, 2022.

Specifically, the CCFPL requires the DFPI to issue rules establishing reasonable procedures for responding to consumer complaints against and inquiries concerning a “covered person” and rules requiring covered persons to provide responses to the DFPI regarding consumer complaints or inquiries that include certain information such as what steps were taken to respond to the complaint or inquiry, and what responses were received by the covered person from the consumer. 

The CCFPL defines “covered person” to mean “to the extent not preempted by federal law, any of the following: (1) any person that engages in offering or providing a consumer financial product or service to a resident of this state, (2) any affiliate of a person described in this subdivision if the affiliate acts as a service provider to the person, or (3) any service provider to the extent that the person engages in the offering or provision of its own consumer financial product or service.”  In addition to entities that are exempt from the CCFPL such as depository institutions and persons acting under the authority of various licenses, certificates, or charters issued by the DFPI, the proposed regulations would not apply to consumer reporting agencies as defined by the Fair Credit Reporting Act or to student loan servicers as defined by Section 1788.100 of the California Civil Code.

Highlights of the proposal include:

Complaint Initiation. Among other things, covered persons must:

  •  Prepare a complaint form for its consumers to use in submitting written complaints, which must be available in electronic format on the covered person’s website and in paper upon request.  The complaint form must include fields to capture the complainant’s identifying information, the nature and details of the complaint and permit supporting documentation to be attached.
  • Disclose in all written communications, except electronic text messages, to each consumer the procedures for filing both oral and written complaints with the covered person.  This disclosure must also inform consumers they may submit a complaint at any time to the DFPI.
  • Prominently display a link on their website to the complaint form and provide instructions on how complainants may submit their oral and written complaints, including contact information.
  • Maintain a telephone number for complaint initiation with a live representative.
  • Not impose a time limit for filing a complaint that is less than four years.
  • Covered person who negotiates a contract with a consumer primarily in Spanish, Chinese, Tagalog, Vietnamese, or Korean must make the complaint process available in both English and the language used for contract negotiation.

Written Acknowledgment of Receipt Required.  The complainant must be provided with written acknowledgement of receipt of a complaint, including the date of receipt, a unique tracking number to identify the complaint, and contact information of whoever is designated to handle the complaint. There are different requirements for providing written acknowledgement of receipt for email or Internet based complaints, complaints received by postal mail, and telephone complaints.

Complaint Review Procedure. When reviewing and evaluating a compliant, a covered person must:

  • Have each complaint be reviewed by staff of the covered person who are responsible for the services and operations which are the subject of the complaint.
  • Require third party service providers to investigate each complaint, and include in its contracts with such third parties clear expectations about the third parties’ responsibilities, as well as appropriate and enforceable consequences for violating these responsibilities.
  • Designate an officer of the covered person to be primarily responsible for the complaint process.

Procedure for Responding to Complaint. Covered persons must respond to complaints as follows:

  • The covered person must generally respond in writing with a final decision on all issues within fifteen (15) calendar days of receiving the complaint.
  • The written response shall contain a clear explanation of the covered person’s decision in plain language, including the specific reasons for the final decision, a summary of the steps taken to respond to the complaint, any corrective action that will be taken, and the effective date of the corrective action.  The response must also inform complainants that they may submit to the DFPI any complaints not resolved to their satisfaction.
  • The covered person shall not take any adverse or retaliatory actions against a complainant, including cancellation of the contract, in retaliation for the filing of a complaint.
  • Once a covered person has provided a written response to a complainant, the covered person may respond to subsequent, duplicative complaints from the same complainant with a written notice stating there will be no response because the complainant previously submitted the same complaint, received a response, and provided no new information in the subsequent, duplicative complaint regarding the same act, omission, decision, condition, or policy.

Written Record Must be Maintained. Covered persons must maintain a written record of each complaint for at least five years from the complaint’s initiation.


Quarterly Reports Required. Covered persons must submit to the DFPI a quarterly complaint report that is also made available to the public.  These quarterly reports must include information regarding all complaints received by the covered person, including complaints forwarded by the DFPI.

Michael R. Guerrero & Peng Shao

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California DFPI Issues Final Regulations Implementing 2018 Law Requiring Consumer-Like Disclosures for Commercial Financing

The California Department of Financial Protection and Innovation (DFPI) has issued final regulations to implement SB 1235, the bill signed into law on September 30, 2018 that requires consumer-like disclosures to be made for certain commercial financing products, including small business loans and merchant cash advances. 

SB 1235, codified at CA Financial Code (Code) sections 22800-22805, requires a “provider,” meaning a person who extends a specific offer of “commercial financing” as defined in Code section 22800(d) to a recipient, to give the recipient certain disclosures at the time the provider extends the offer.  The law contains exemptions and carve-outs for, among other things, depository institutions, financings of more than $500,000, closed-end loans with a principal amount of less than $5,000, and transactions secured by real property.  However, while depository institutions are exempt, SB 1235 treats certain nonbank partners as “providers” subject to the law’s disclosure requirements.  Specifically, SB 1235 defines a “provider” to include “a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.”

Pursuant to SB 1235, the DFPI was tasked with issuing regulations implementing the law’s disclosure requirements.  Providers will be required to comply with the new disclosure requirements beginning December 9, 2022, the date the final regulations become effective.

The regulations provide that the disclosure requirements apply “only to recipients whose business is principally directed or managed from California.”  For purposes of determining  whether a recipient’s business “is principally directed or managed from California,” a provider can rely on any written representation by the recipient as to whether it is principally directed or managed from California or the business address provided by the recipient in its application for financing.  If a business qualifies as a “recipient,” the new disclosure requirements would appear to apply regardless of where the provider is located.

The regulations are detailed as to both the format and content of the disclosures that must be provided and the specific requirements vary depending on the type of commercial financing offered. In addition to extensive definitions and general requirements, the regulations contain separate requirements for:

  • Closed-end transactions
  • Commercial open-end credit plans
  • Factoring transactions
  • Sales-based financing
  • Lease financing
  • Asset-based lending transactions
  • Commercial financing that does not fall into any of the above categories

New York regulators have yet to issue final regulations implementing the state’s Commercial Finance Disclosure Law, which went into effect on January 1, 2022.  In March 2022 and April 2022, Utah and Virginia, respectively, became the first two states to require the registration of providers of merchant cash advances.  The new laws also include disclosure requirements.  

Michael R. Guerrero & John Sadler

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Podcast Episode: A Conversation With Special Guest Peggy Twohig, Former CFPB Assistant Director for Supervision Policy and Strategy

Ms. Twohig, a recognized consumer finance expert, shares her insights regarding the CFPB’s supervisory program.  Our discussion topics include: the differences between the CFPB’s supervisory program and the programs of the federal and state banking regulators; the CFPB’s approach to allocating resources, conducting exams, and examiner training; the origins and objectives of Supervisory Highlights; how the CFPB’s supervisory focus has changed over time and the impact of leadership changes; and the CFPB’s recent announcements regarding use of its risk-based supervisory authority for nonbanks and use of UDAAP to combat non-credit discrimination.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation.

Click here to listen to the episode.

Alan S. Kaplinsky

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Bank/Nonbank Partnerships Could Face CFPB Scrutiny

Delivering the keynote address at the Consumer Federation of America’s 2022 Consumer Assembly, CFPB Deputy Director Zixta Martinez indicated that the CFPB “is taking a close look” at “‘rent-a-bank’ schemes.”

Deputy Director Martinez commented that “[s]ome lenders attempt to use [relationships with banks] to evade state interest rate caps and licensing laws by making claims that the bank, rather than the non-bank, is the lender.”  She stated that “lenders employing rent-a-bank schemes have unusually high default rates, which raise questions about whether their products set borrowers up for failure.”  She reported that the CFPB’s consumer complaints database “reveals a range of other significant consumer protection concerns with certain loans associated with bank partnerships.”

To date, CFPB enforcement actions have raised “rent-a-charter” challenges only in the context of tribal lending, most notably in its enforcement action against CashCall.  The CFPB’s lawsuit broke new ground by asserting UDAAP violations based on CashCall’s efforts to collect loans that were purportedly void in whole or in part under state law.  The CFPB’s complaint alleged that the loans in question, which were made by a tribally-affiliated entity, were void in whole or in part as a matter of state law because based on the substance of the transactions, CashCall was the “de facto” or “true” lender and, as such, charged excessive interest and/or failed to obtain a required license.

The district court agreed with the CFPB that because CashCall was the “true lender” on the loans, the tribe affiliated with the loans did not have a sufficient relationship with the loans for the court to enforce the tribal choice of law provision in the loan agreements and there was no other reasonable basis for the choice of tribal laws.  Accordingly, the district court found that CashCall had engaged in a deceptive practice within the meaning of the CFPA when servicing and collecting on the loans by creating the false impression that the loans were enforceable and that borrowers were obligated to repay the loans in accordance with the terms of their loan agreements. 

On appeal, the Ninth Circuit ruled that the district court was correct to both refuse to give effect to the choice of law provision and to apply the law of the borrowers’ home states, thereby causing the loans to be invalid.  It called the tribal entity’s role in the transactions “economically nonexistent” and to have “no other purpose than to create the appearance that the transactions had a relationship to the Tribe.”  According to the Ninth Circuit, “the only reason for the parties’ choice of [tribal] law [in the loan agreements] was to further CashCall’s scheme to avoid state usury and licensing laws.” 

It should be noted, however, that the Ninth Circuit expressly disclaimed use of a “true lender” theory as the basis for its decision.  In response to CashCall’s objection to the district court’s conclusion that it was the “true lender” on the loans, the Ninth Circuit stated that “[t]o the extent CashCall invokes cases involving banks, we note that banks present different considerations because federal law preempts certain state restrictions on the interest rates charged by banks.”  Commenting that “[w]e do not consider how the result here might differ if [the tribal entity] had been a bank,” the Ninth Circuit stated that “we need not employ the concept of a ‘true lender,’ let alone set out a general test for identifying a ‘true lender.’”  In its view, for purposes of the choice of law question, it was only necessary to look at the  “economic reality” of the loans which “reveal[ed] that the Tribe had no substantial relationship to the transactions.”

Most significantly, the Ninth Circuit rejected CashCall’s argument that a finding of a deceptive practice under the CFPA could not be based on deception about state law.  It found no support for the argument in the CFPA and noted that while the CFPA prohibits establishment of a national usury rate, the CFPB had not done so in CashCall because each state’s usury and licensing laws still applied.

Ms. Martinez’ comments raise the possibility that the CFPB will now attempt to use UDAAP outside of the tribal context to challenge nonbanks involved in bank partnerships by alleging violations of state usury and licensing laws based on the theory that the partnership is a “rent-a-bank scheme.”  However, since many of the banks involved in such partnerships are smaller banks as to which the CFPB does not have supervisory or enforcement authority (i.e. banks with $10 billion or less in assets), the CFPB would need to navigate potential concerns that the FDIC, the banks’ primary federal regulator, might have if the CFPB were to challenge such partnerships.

Nonbank/bank partnerships are currently under siege from several directions.  Four Democratic members of the California state legislature recently sent a letter to the FDIC urging the agency to take action against FDIC-supervised banks that partner with non-bank lenders to originate high-cost installment loans.  On June 1, 2022, a class action lawsuit was filed  against fintech lender Opportunity Financial, LLC (OppFi) in a Texas federal district court in which the named plaintiff alleges that OppFi engaged in a “rent-a-bank” scheme with a state-chartered bank to make loans at rates higher than allowed by Texas law.  OppFi is also engaged in litigation in California state court where the California Department of Financial Protective and Innovation is attempting to apply California usury law to loans made through OppFi’s partnership with a state-chartered bank by alleging that OppFi is the “true lender” on the loans.

- Michael GordonRonald K. Vaske & Mindy Harris

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2021 HMDA Data Released

The Federal Financial Institutions Examination Council (FFIEC) recently announced the public availability of Home Mortgage Disclosure Act data for 2021. The CFPB also released a summary of the data. The data include information on 23.8 million home loan applications, with 21.1 million being identified as closed-end loan applications. A total of 15 million applications resulted in loan originations. 

Among other items, the data reflect the following:

  • The number of reporting institutions declined by about 3.1 percent from 4,475 in 2020 to   4,338 in 2021.
  • The share of first lien, owner-occupied, site built home purchase loans originated by non-bank, independent mortgage companies increased from 60.7 percent in 2020 to 63.9 percent in 2021. 
  • The share of first lien, owner-occupied, site built home purchase loans made to (1) Black or African American borrowers rose from 7.3 percent in 2020 to 7.9 percent in 2021, and (2) Hispanic-White borrowers rose from 9.1 percent in 2020 to 9.2 percent in 2021.                  
  • The denial rates for first lien, owner-occupied, site built home purchase conventional loans were 15.7 percent for Black or African American applicants, 9.8 percent for Hispanic-White applicants, 7.5 percent for Asian applicants and 5.6 percent for non-Hispanic-White applicants.  In its press release the CFPB observed that “These relationships are similar to those found in earlier years and, due to the limitations of the HMDA data mentioned above, cannot take into account all legitimate credit risk considerations for loan approval and loan pricing.”
  • The share of first lien, owner-occupied, site built home purchase loans made to low- or moderate-income borrowers (borrowers with incomes below 80 percent of the area median income) decreased from 30.4 percent in 2020 to 28.7 percent in 2021.  In contrast, the share of first lien refinance loans on such properties made to such borrowers increased from 18.9 percent in 2020 to 24 percent in 2021.
  • The share of first lien, owner-occupied, site built home purchase loans that were insured by the Federal Housing Administration decreased from 19.4 percent in 2020 to 17.2 percent in 2021.

In March 2022 the FFIEC released modified 2021 Loan/Application Registers for each HMDA reporting institution. In its press release regarding the data, the CFPB notes that “HMDA data are generally not used alone to determine whether a lender is complying with fair lending laws. The data do not include some legitimate credit risk considerations for loan approval and loan pricing decisions. Therefore, when regulators conduct fair lending examinations, they analyze additional information before reaching a determination about an institution’s compliance with fair lending laws.”                                                   

Richard J. Andreano, Jr.

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Simplification and Possible Registration of Nonbanks on CFPB Rulemaking Table

CFPB rulemaking was the subject of a new blog post by Director Chopra published last week titled “Rethinking the approach to regulations.”

Director Chopra first discussed the CFPB’s efforts “to move away from highly complicated rules that have long been a staple of consumer financial regulation and towards simpler and clearer rules.”  He indicated that the CFPB “is dramatically increasing the amount of guidance it is providing to the marketplace, in accordance with the same principles.”

Commenting that “[u]nnecessary complexity places new entrants and small firms at a disadvantage compared to their larger competitors,” he indicated that the CFPB plans to issue guidance that sets forth “simple bright-lines.”  According to Director Chopra, this approach will “prevent strategic or intentional ‘misunderstanding’ or plausible deniability that some companies use to ignore the law.”  He asserted that complexity “gives companies the ability to claim there is a loophole with creative lawyering.”

With respect to what he called “traditional rulemaking,” Director Chopra identified as priorities the Section 1033 rulemaking on consumer access to financial information, the Section 1071 rulemaking on data collection and reporting requirements in connection with credit applications made by women- or minority-owned small businesses, and rulemakings regarding quality control standards for automated valuation models and property assessed clean energy financing.

Most notably, he indicated that the CFPB “is reviewing other authorities authorized by Congress that have gone unused.”  Specifically, he identified the CFPB’s  authority to register certain nonbanks and stated that the CFPB is assessing whether to use that authority “to identify potential scammers and others that repeatedly violate the law.”  (Pursuant to Dodd-Frank Section 1022, the CFPB is authorized to “prescribe rules regarding registration requirements applicable to a covered person, other than an insured depository institution, insured credit union, or related person.”)  In regulatory agendas issued under former Director Cordray, the CFPB had indicated that it was considering whether rules to require registration of certain nonbanks would facilitate supervision.

Director Chopra also discussed the need to for the CFPB to take “a fresh look” at certain long-standing rules.  In addition to the CARD Act (Regulation Z) rules establishing safe harbors for credit card late charges, he indicated that the CFPB is reviewing the FTC rules implementing the FCRA (Regulation V) “in an effort to identify potential enhancements and changes in business practices,” and the Regulation Z qualified mortgage rules “to explore ways to spur streamlined modification and refinancing in the mortgage market, as well as assessing aspects of the ‘seasoning’ provisions.”

Finally, he indicated that in addition to using its new “circulars” to encourage consistent enforcement among government agencies, the CFPB would be “increas[ing] its interpretation of existing law to the marketplace” and referenced the CFPB’s advisory opinion program launched in 2020.

We are somewhat dubious about the CFPB taking on this massive project for several reasons.  First, to the extent the new approach to rulemaking is intended to apply to CFPB regulations and the regulations that the CFPB inherited from other agencies, Director Chopra has demonstrated a reticence to use new rulemaking as a tool, as opposed to enforcement, supervision, and the issuance of statements.  That is because rulemaking is very labor intensive and time-consuming and often leads to lawsuits challenging it, with the payday loan rule serving as a good example. 

Second, what Director Chopra has announced is very ambitious.  It would amount to a complete overhaul of all CFPB regulations and inherited regulations to convert them from complex, detailed, and prescriptive regulations to short, simple, non-prescriptive regulations with “bright-line” tests.  We doubt that the CFPB has nearly the bandwidth or time to undertake such a massive project, one which seems almost certain to engender opposition from the industry.  When regulators impose steep penalties for even-technical violations of regulations, regulated entities will want and need prescriptive rules rather than general principles.

We will be watching to see to what extent Director Chopra’s comments are reflected in the CFPB’s Spring 2022 rulemaking agenda which we expect to be released soon.  

- Michael Gordon & John L. Culhane, Jr.

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Key Differences Between the OCC’s Rescinded 2020 CRA Final Rule and the 2022 CRA Revisions Proposed by U.S. Banking Regulators

As we previously reported, the Office of the Comptroller of the Currency (“OCC”) rescinded its 2020 Community Reinvestment Act (“CRA”) final rule (the “2020 CRA Final Rule” or the “Rescinded Rule”) in December 2021 and has since been operating under a CRA framework largely based on the OCC’s 1995 CRA rule (the “1995 Rule”), which was adopted jointly with the Federal Reserve and the FDIC. After announcing in 2021 their intent to work collaboratively to update the CRA regulations to achieve a more consistent framework, revisions to the CRA’s implementing regulations were recently proposed by the three U.S. banking regulators (the “2022 Joint Notice” or the “Proposal”).  According to the regulators, the Proposal builds upon previous agency proposals, stakeholder feedback, and research to achieve certain core objectives, some of which include accomplishing the statutory purposes of the CRA, adapting to changes in the banking industry, promoting transparency and public engagement, and creating a consistent regulatory approach amongst the three banking agencies.

In this post, we continue to explore the Proposal in more detail by discussing some key differences between the Rescinded Rule and the Proposal, namely differences in(1)  how banks delineate assessment areas; (2) the evaluation framework used; and (3) data collection and data retention requirements.

(1) Assessment Areas and Areas for Eligible Community Development Activity

2020 CRA Final Rule:

  • Under the Rescinded Rule, the facility-based assessment area of a bank (other than a wholesale or limited purpose bank) included the location of a bank’s main office, branches, or a non-branch deposit-taking facility that was not an ATM, the surrounding locations in which the bank had originated or purchased a substantial portion of its qualifying retail loans, and, at a bank’s discretion, the location of the bank’s deposit-taking automated teller machines.  The facility-based assessment area included a whole Metropolitan Statistical Area (“MSA”), the whole non-metropolitan area of the state, one or more whole, contiguous metropolitan divisions in a single MSA, or one or more whole, contiguous counties or county equivalents in a single metropolitan statistical area or nonmetropolitan area.
  • The Rescinded Rule also included a deposit-based assessment area component that applied to banks with 50 percent or more of their retail domestic deposits outside of their facility-based assessment areas.  Banks that met this threshold and had locations with a concentration of 5 percent or more of the bank’s retail domestic deposits would be required to include that area as part of its CRA assessment area.

2022 Joint Notice:

  • Under the Proposal, banks would continue to utilize a facility-based delineation for assessment areas, but the geographic requirements for delineating these areas would be based on bank size.  For large, wholesale, or limited purpose banks, this would include one or more MSAs or metropolitan divisions or one or more contiguous counties within an MSA, metropolitan division, or nonmetropolitan area of a state.  Small and intermediate banks could delineate facility-based assessment areas that include a partial county.
  • The Proposal does not include the Rescinded Rule’s 50 percent – 5 percent rule that required a bank that collects deposits above 50 percent of their total retail domestic deposits from outside of its physical branch to delineate additional assessment areas in those areas where they draw more than a certain percentage of deposits.
  • Large banks would also be required to delineate retail lending assessment areas where a bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas.
  • Retail loans located outside any facility-based assessment area or retail lending assessment area for large banks, and outside any facility-based assessment area for intermediate banks with substantial outside assessment area lending, would be evaluated on an aggregate basis at the institution level.  
  • Banks would also receive CRA credit for any qualified community development activity, regardless of location.

Performance Tests and Standards

2020 CRA Final Rule:

  • While the OCC’s Rescinded Rule retained the performance standards under the 1995 Rule for small and intermediate banks, wholesale and limited purpose banks, and retained the option for banks to submit and be evaluated under a strategic plan, the framework under the Rescinded Rule also applied a general performance standard (“GPS”) for larger banks in an effort to create a more objective measure of CRA performance.
  • Banks evaluated under the GPS standard would determine their CRA evaluation measure as the sum of (1) the bank’s annual qualified activities value (“QAV”) divided by the average quarterly value of the bank’s retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas (e.g., areas that include LMI census tracts, distressed areas, underserved areas, disaster areas or Indian country) divided by its total number of branches multiplied by .02.  A bank’s assessment area CRA evaluation measure was determined in each assessment area and was the sum of (1) the bank’s annual assessment area QAV divided by the average quarterly value of the bank’s assessment area retail domestic deposits as of the close of business on the last day of each quarter for the same period used to calculate the annual assessment area QAV; and (2) the number of the bank’s branches located in or that serve Qualifying Areas divided by its total number of branches in the assessment area multiplied by .02.
  • In each assessment area, the OCC applied a geographic distribution test and borrower distribution test on the CRA loans and evaluated whether the bank passed by looking at the demographics of the area or the activities of peer banks.
  • A bank’s assigned CRA rating was determined based on the bank’s presumptive rating adjusted for performance context, which included (1) how the bank’s capacity to meet the performance standards was affected by its product offerings and business strategy, unique constraints, innovativeness, and the bank’s business infrastructure and staffing; (2) how the bank’s opportunity to engage in qualifying activities was affected by demand and demographic factors; (3) competitive environment (including peer performance); (4) comments submitted regarding needs and opportunities; and (5) other relevant information.

2022 Joint Notice:

  • Instead of  the Rescinded Rule’s GPS model, the evaluation framework under the Proposal would include four tests: a Retail Lending Test, a Retail Services and Products Test, a Community Development Financing Test, and a Community Development Services Test.  (See our prior blog post for a detailed explanation and analysis of the four tests.)  The framework is tailored for differences in bank size and business model (e.g., large banks would be subject to all four tests, whereas small banks could opt into the Retail Lending Test if they chose not to be evaluated under the current small bank lending test).  Current lending tests for small banks and the community development test for intermediate banks are substantially retained under the Proposal.  A bank’s rating would be based on combining scores from its performance test in, as applicable, states, multistate MSAs, and at the institution level.

Data Collection, Recordkeeping, and Reporting Requirements

2020 CRA Final Rule:

  • The Rescinded Rule required all OCC-regulated banks to collect and maintain data and supporting information throughout the assessment period.
  • GPS-evaluated banks or banks choosing to be evaluated under a strategic plan were required to collect and maintain (along with supporting information) retail lending test distribution ratios, CRA evaluation measures and assessment area CRA evaluation measures, community development minimums and assessment area level community development minimums, qualifying loan data, data on non-qualifying loans, community development investment data and community development services data, retail domestic deposit data, and assessment area information.

2022 Joint Notice

  • Under the Proposal, large banks (i.e., banks with assets over $10 billion) would be required to collect, maintain, and report additional data, such as deposits data, automobile lending data, retail services data on digital delivery systems, retail services data on responsive deposit products, and community development services data.
  • All large banks would be required to report the delineation of their assessment areas based on: (i) the locations of their facilities; and (ii) where the bank has concentrations of home mortgage and/or small business lending outside of its facility-based assessment areas.  Large bank reporting of facility-based assessment areas would include a list for each assessment area showing the states, MSAs, metropolitan divisions, and nonmetropolitan counties within each facility-based assessment area.  Under the proposal, large banks would be required to delineate at least full counties for facility-based assessment areas.  Large banks would also be required to collect and report annually to the agencies a list showing the MSAs and counties within each retail lending assessment area.  The agencies could verify retail lending assessment area designations using HMDA and CRA small business/small farm data, and the agencies could explore calculating retail lending assessment areas for banks.
  • Data requirements for intermediate banks and small banks would remain unchanged from the current requirements.

The OCC’s 2020 CRA Final Rule represented an attempt by the OCC to modernize its existing CRA regulations. The current framework under which the U.S. banking regulators have continued to operate since the rescission of the 2020 CRA Final Rule has become increasingly outdated given the changes in the way banking is done and how financial products and services are offered.  The Proposal, if adopted in substantially the form as proposed, differs in some key areas from the Rescinded Rule, but nonetheless stands to modernize the existing CRA framework and potentially create a more consistent regulatory approach among the U.S. banking regulators.  The comment period remains open until August 5, 2022.

In our next blog posts, we will cover how assessment areas are delineated under the Proposal, the Community Development Test, and the impact of the Proposal on small, intermediate, and large banks.

Tomorrow, we will be releasing a new podcast episode in which we discuss the Proposal with Kenneth Thomas who is widely-viewed as the nation’s leading CRA expert and has advised federal regulators on CRA reform.

Scott A. Coleman & Sarah B. Dannecker

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Mr. Thomas is widely-viewed as the nation’s leading CRA expert and has advised federal regulators on CRA reform. After reviewing CRA’s origins and purpose, we discuss how the new proposal differs from the OCC’s rescinded 2020 final CRA rule and the current CRA rules, including the proposal’s higher asset threshold for small banks and approach to assessment areas, how industry and consumer groups have reacted to the proposal, and next steps and possible timetable for issuance of final rules. We also discuss state efforts to enact CRA-like laws and the concept that the CFPB should have a role in approving bank mergers.

Alan Kaplinsky, Ballard Spahr Senior Counsel, hosts the conversation joined by Scott Coleman, a partner in the firm’s Consumer Financial Services Group.

Click here to listen to the podcast episode.

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Opportunity to Comment on NMLS Disclosure Questions Proposal

A proposal that incorporates regulator feedback on Policy Committee-approved proposed revisions to the NMLS disclosure questions is available for public comment and feedback.

Revisions include:

  • Revisions required as a result of the Money Transmission Modernization Act:
    • E.g., “In the past 10 years, has the entity or a control affiliate been involved in any material litigation?”
  • Revisions to make the disclosure questions more consistent as between individual and company questions by category, etc.;
  • Revisions to ensure consistency in language in both company and individual disclosure questions;
  • Revisions to glossary definitions:
    • Including the definition of “Financial Services or financial services-related” – which, among other things was expanded to include consumer protection laws or regulations that pertain to the financial services items enumerated in the definition
  • Addition of terms to the glossary:
    • “Material Litigation”: Litigation that according to generally accepted accounting principles is significant to an applicant’s or a licensee’s financial health and would be required to be disclosed in the applicant’s or licensee’s annual audited financial statements, report to shareholders, or similar records.”
  • Creation of a new section dedicated to those questions related to activities that occurred while an individual exercised control over an organization;
  • Creation of a new section dedicated to those questions related to the company’s or the individual’s authorization to act as a contractor, accountant or attorney, and the addition of financial services licenses and other professional licenses to this inquiry.

The proposal is available here. Comments are due by August 22, 2022.

In addition, a town hall will be held on Thursday, July 28. Registration information for Industry Members can be found here.

- Stacey L. Valerio

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