If you were looking for a break from the turmoil of 2020, then 2021 is poised to disappoint as we start the year with an ongoing pandemic, a social media-fueled GameStop gamma squeeze, and a brisk transition into a consumer-focused Biden Administration. While many things seem unpredictable in the year to come, enforcement priorities are coming into focus in the world of consumer financial regulation and enforcement.
Prediction #1: More Aggressive Consumer Protection Enforcement at the State and Federal Levels with Immediate Focus on Consumers Impacted by the Pandemic
Predicting that regulatory and enforcement agencies will significantly increase their enforcement activity demonstrates our Ph.D. in the obvious. However, do not be fooled into thinking this wave will come only from the Consumer Financial Protection Bureau (“CFPB”). To be sure, President Biden’s nominee for CFPB Director, Rohit Chopra, has a reputation for cracking down hard on financial services companies accused of consumer protection law violations, but keep in mind that other federal agencies are also gaining new leadership that take a similar stance on consumer protection. The Federal Trade Commission’s new chair, Rebecca Kelly Slaughter, has already announced the agency’s forthcoming focus on effective and efficient enforcement, COVID-related privacy issues, and racial equity. While a nominee for Comptroller of the Currency has not been announced, it has been reported that Senators Sherrod Brown and Elizabeth Warren are pushing for candidates with strong consumer protection leanings. Kristen Clarke, the nominee to head the Civil Rights Division at the U.S. Department of Justice—the division that investigates fair lending and Servicemembers Civil Relief Act cases—has a long career pursuing such cases in the government and non-profit sectors.
Oh wait. Did we forget to mention the states? In 2011, the famous catch phrase for the CFPB was that “there is a new sheriff in town.” Taking a page from the CFPB’s book, California has created its own sheriff’s office known as the Department of Financial Protection and Innovation (“DFPI”). While still in start-up mode, there are early indications that financial service companies doing business in California will be monitored carefully for unlawful conduct. Other states that remained active over the past four years—New York, Massachusetts, Illinois, Virginia, and Maryland—will feel even more emboldened in the current Administration, knowing that their efforts will be supported by their federal counterparts.
Last, but certainly not least, don’t leave out the consumer advocacy and civil rights organizations that are effectively deputized by government agencies to investigate and present consumer protection cases to them. With these organizations expecting willing partners under the new Administration, banks in particular should keep a watchful eye for new waves of mystery shopping and other industry-wide sweeps involving lending and servicing practices.
What does this newly composed lineup mean for financial services companies? It means not only a likely increase in the volume of enforcement investigations and settlements, but also a return to more aggressive legal theories of liability, more frequent and larger penalties and restitution, and a shift back to resolving claims through enforcement channels in lieu of the supervisory process. Now is the time for financial services companies to reassess the current strength of their compliance and third-party oversight functions.
In terms enforcement priorities, the most obvious and immediate candidate is the treatment of consumers financially impacted by COVID-19. On January 28, CFPB Acting Director Dave Oejio made clear that one of the first priorities of the Bureau’s Supervision, Enforcement, and Fair Lending Division (“SEFL”) is obtaining “relief for consumers facing hardship due to COVID-19 and the related economic crisis” and that he has directed SEFL to expedite COVID-19-related enforcement actions. The CFPB has publicly shared the results of its “prioritized assessments” conducted in 2020, which served as an early indicator of areas where banks and other financial services companies may have struggled to effectively or properly serve the needs of their customers during the pandemic.
That was only the starting point. A review of “first day letters” recently received by various banks from other regulatory agencies in connection with upcoming examinations strongly suggests lending and servicing activities impacting consumers experiencing pandemic-related hardships will continue to be focal points. Moreover, the CFPB’s recission of the Abusiveness Policy Statement and seven COVID-19 related policy statements made under Director Kraninger indicates that the agency is ready to halt the “temporary flexibilities” afforded to the industry and proceed full steam ahead with “the full scope of [its] supervisory and enforcement authority.” The CFPB’s emphasis remains heavily centered on accommodations in servicing distressed mortgage, auto, and student loan borrowers. To avoid further retraction of access to banking and lending services, regulators are also looking at credit reporting and overdraft practices. Credit reporting is a particularly ripe target considering that issues related to it made up fifty-eight percent of the complaints received by the CFPB in 2020. Based on the lawsuits and media attention devoted to disparities in service to minority and women-owned businesses in the first phase of the Paycheck Protection Program (“PPP”), banks that administered the PPP loans can also expect a close inspection of their practices.
Prediction #2: Fair Lending Enforcement to Support Administration’s Anti-Discrimination Agenda
President Biden has made equity a cornerstone of his policy agenda and put words into action in the early days of his Administration. On day one of his presidency, President Biden issued an Executive Order “Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.” The President followed that announcement less than a week later with a related speech and four additional executive orders on the topic. Among those orders was a directive instructing the Department of Housing and Urban Development to take all necessary steps to redress racially discriminatory federal housing policies that contribute to wealth inequality.
Much of the attention on predicting fair lending enforcement priorities has centered on how the disparate impact theory will be used during the Biden Administration. The industry should expect to see public statements and guidance on disparate impact in the near term, effectuating a 180-degree retreat from former CFPB Acting Director Mick Mulvaney’s 2018 statements suggesting the Bureau was committed to enforcing disparate treatment cases—code for its refusal to pursue disparate impact cases. Notably, a number of state attorneys general responded to Mulvaney’s comments with a plea to continue enforcing disparate impact cases; a signal that such cases may also start to surface at the state level.
While it will come as no surprise that disparate impact theory will be revived in this Administration, it is less clear where it will be applied. Areas ripe for such scrutiny include student lending, in light of Rohit Chopra’s prior role as the CFPB’s Student Loan Ombudsman. The identification of racial inequities in the delivery of financial services during COVID-19 makes mortgage and auto servicing likely targets as well. The harsh and highly publicized criticism of how PPP funds were disbursed to minority and women-owned businesses means the industry should anticipate cases tied to banks’ “overlays” to the Small Business Administration’s eligibility requirements that required a pre-existing commercial relationship to apply for a PPP loan. Another area that has historically drawn UDAAP scrutiny but may shift into fair lending liability is the sale of ancillary products disproportionately marketed and sold to consumers in certain prohibited basis groups. And don’t be fooled into thinking that dealer markup is in the rear-view mirror. While the federal enforcement agencies appear to have lost their appetite for dealer markup cases against banks and captives, some state attorneys general have not been deterred by Congress’ repeal of the CFPB’s indirect auto bulletin.
President Biden has also focused on combatting discrimination on the basis of gender and sexual identity. He had a busy first day releasing another anti-discrimination executive order on “Preventing and Combating Discrimination on the Basis of Gender Identity or Sexual Orientation” which directs each agency head to review its policies and adjust accordingly. In response, the CFPB issued an interpretive rule clarifying that “that the prohibition against sex discrimination under the Equal Credit Opportunity Act (ECOA) and Regulation B includes sexual orientation discrimination and gender identity discrimination” and specifically “covers discrimination based on actual or perceived nonconformity with traditional sex- or gender-based stereotypes, and discrimination based on an applicant’s social or other associations.”
Prediction #3: Greater Focus on Fair and Responsible Use of Technology and Innovation in Financial Services
During the last Administration, the federal banking agencies addressed the issue of systemic barriers to credit by promoting better use of technology and innovation. Regulators jointly issued a statement on the use of alternative data in underwriting widely seen to encourage the use of technology-enabled underwriting for those with limited credit history. Former Acting Comptroller Brian Brooks launched Project REACh, otherwise known as the Roundtable for Economic Assistance and Change, which convenes bankers, civil rights organizations, and tech companies to discuss financial inclusion measures that industry participants can take. The CFPB’s latest Fair Lending Report devoted its entire first section to “Innovations in access to credit,” lauding technological advances such as its “No Action Letter” to online lender Upstart Network, Inc. The CFPB also held its first “Tech Sprint” in October to develop new approaches to electronic delivery of adverse action notices.
While new leadership at the Bureau and elsewhere is not expected to shut down efforts to leverage technology such as machine learning or innovative use of alternative data, regulators may approach such initiatives with greater caution. Use of automated decisioning, artificial intelligence, and non-traditional data sources has the potential for expanding access to credit, but some government officials have warned industry about the potential risks of leaving out important market segments. Federal Reserve Governor Lael Brainard recently gave remarks to the AI Academic Symposium, in which she warned the industry to pay attention to the lack of model transparency, advocated for more attention to be paid to designing AI models that avoid bias and promote financial inclusion, and noted that the Federal Reserve Board is “exploring whether additional supervisory clarity is needed to facilitate responsible adoption of AI.” Two months later, five regulators, including the CFPB and Federal Reserve, published a request for information seeking comments on the use of artificial intelligence and machine learning by financial institutions. The request specifically seeks input on appropriate governance, risk management, and controls over AI as well as challenges to develop, adopt, and manage it.
There are two key take-aways on use of technology and innovation in financial services in this Administration. First, make sure that legal and compliance have a seat at the table at each stage of development—and not just in the origination and servicing of products. All too often, the business line gets out ahead of compliance, and it can be difficult to modify launch dates if checkpoints are not embedded throughout the process. Second, avoid the temptation to rely on what the competition is doing as an endorsement that a product is compliant. Companies have different risk profiles and approaches to risk management, so be sure to operate within your own organization’s risk framework. Put simply, just because everyone does it doesn’t mean it’s a good idea.
Financial services companies—from banks to fintechs and more—should be buckling up for a fast-paced regulatory and enforcement environment in the coming months. Pressure to grow and diversify amidst the never-ending stream of entrants to the market remains unchanged. With regulatory and enforcement changes on the horizon, the added challenge is recalibrating the balance of risk and reward.