The CFPB released their annual Fair Lending Report to Congress earlier this summer. Here is the first of our two-part blog about the regulatory insights you may have missed from this important compliance update.
Earlier this summer, the CFPB quietly released the 2018 Fair Lending Report to Congress. (We say quietly because it still isn’t listed in the Fair Lending report section of the Bureau’s website, although there was a blog post.)
In the intervening weeks, we’ve spent more time reviewing the report and thinking about the future of Fair Lending compliance. A few things stand out about this report.
Here are the first 7 of the 15 most important insights from the CFPB’s 2018 Fair Lending Report to Congress.
From naming changes to Fair Lending supervision, these are the facts you need to know as we navigate the second half of the year. As there are quite a few, we’re splitting this blog up into two parts. This blog is the first part.
Want a printable version of all 15? You can get it here.
1. What do we call the Bureau? It’s still not clear.
Is it the CFPB? The BCFP? The Consumer Financial Protection Bureau? The Bureau of Consumer Financial Protection? It’s simply not clear.
Here’s the current state of things: the website uses the old green logo, the Fair Lending report uses the new seal with the “Bureau of Consumer Financial Protection” language, Director Kathy Kraninger calls the agency the Consumer Financial Protection Bureau, and both acronyms (CFPB and BCFP) are used in the report and the website.
The CFPB acronym is used more frequently in the report than BCFP (24 versus 4 times, respectively). Most writers and industry insiders have landed on referring to this powerful agency simply as “the Bureau.”
We’ll keep referring to the agency as the CFPB, Consumer Financial Protection Bureau, or just Bureau here at NTRUPOINT.
2. Under this administration, the Bureau is reinterpreting its mandate.
This isn’t news, per se. Over the last few years, the Bureau’s approach to Fair Lending supervision and enforcement has changed dramatically.
This shift was articulated differently in the 2018 Fair Lending Report than it has been in the past. The Bureau is now focused on “prevention.”
“I believe that the best application of these tools is to focus on prevention of harm to consumers and that includes protecting consumers from unfair, deceptive and abusive acts or practices as well as from discrimination."
- CFPB Director Kathy Kraninger, in the 2018 Fair Lending Report
In this new framework, the Bureau’s key tools are focused more on preventing UDAAP and Fair Lending risks to consumer than on enforcement.
Additionally, the Office of Fair Lending and Equal Opportunity is moving from the Supervision, Enforcement, and Fair Lending Division to the Director’s Office. It’s also evolving into a new office, the Office of Equal Opportunity and Fairness.
3. The Bureau revealed that 45 million Americans are credit invisible or lack sufficient credit history.
In the Report, the Bureau shared that approximately 20% of the adult population in the US, about 45 million Americans, have no credit history or very little credit history. These individuals are typically seen as part of the unbanked or underbanked population.
Being “credit invisible” causes unique challenges for those consumers, and for the financial system in serving them. Specifically, those consumers to face barriers to accessing credit, or pay more for credit. This can limit their ability to withstand financial shocks and achieve financial stability.
Their recent Building a Bridge to Credit Visibility symposium was very focused on bringing key industry people together to talk about this unique issue, and identify ways to expand access to credit to the credit invisible. Hundreds of industry professionals joined. You can read the full report here.
The Symposium highlighted the following key themes:
- Strengthen the business case for expanding access to credit.
- Explore innovation that expands credit access without sacrificing consumer protections.
- Understand the experience of the credit invisible population.
- Recognize that “high-touch” relationships are important.
- Conduct more research and data analysis.
- Be mindful that not all credit is equal.
Providing fair access to financial services is one of the key responsibilities of financial institutions, so this data - and the potential insights on how to serve this population - should be really fascinating to bankers everywhere.
4. There may be different credit scoring models in the future.
In the report, the Bureau noted that they are exploring new approaches to credit scoring and credit characteristics. This is (at least in part) a response to the data that one in five American adults is “credit invisible.”
The Bureau is recommending that supervisory reviews are conducted of the existing third-party credit scoring systems. According to the report, “these recommended reviews would focus on obtaining information and learning about the models and compliance systems of third-party credit scoring companies for the purpose of assessing fair lending risks to consumers and whether the models are likely to increase access to credit.”
A new credit scoring model might use things like utility or mobile phone bills, or even social media data, to determine the creditworthiness of an individual. This alternative data can really help the credit invisible gain access to credit.
The potential benefits are pretty clear. The challenge is that a new credit scoring model may present Fair Lending risk.
5. The Bureau is serious about re-evaluating its approach to disparate impact.
Last spring, then-Acting Director Mick Mulvaney announced that the Bureau intends to reconsider disparate impact and ECOA. A few months later, in October 2018, the Bureau announced in their Fall 2018 Rulemaking Agenda that reconsidering the disparate impact doctrine would likely be a priority.
The 2018 Fair Lending Report reiterated these statements, and announced that there will be an upcoming symposium on disparate impact and ECOA. Details will be released on the CFPB’s website.
This sounds more formal than simply adjusting their approach to disparate impact and discrimination. There’s a good chance that a new rule or amendment to Reg. B could be forthcoming, although there is no real timeline for such a change. Any update would have to clearly explain if and when disparate impact can be considered, and how it would be evaluated.
A change to how, when, and why the disparate impact doctrine can be applied would have huge implications for the industry. We’re watching this closely.
6. The Bureau is trying to actively foster innovation in financial services and compliance.
In 2012, the Bureau launched Project Catalyst. In 2018, that project evolved into a newly-created office, the Office of Innovation. In their own words, “the Office of Innovation helps the Bureau fulfill its statutory mandate to promote competition, innovation, and consumer access within financial services.”
Project Catalyst is designed to encourage consumer-friendly developments in markets for consumer financial products and services, through research and testing. It was originally launched in 2012. Project Catalyst is best known for introducing the idea of the No-Action Letter.
The No-Action Letter is a guarantee that the Bureau won’t take any enforcement action against a company for trying a new product or service, as long as the company is willing to share certain information for the Bureau’s monitoring, and complies with certain rules. This has the potential to provide valuable market data.
However, as time has passed, it’s become clear that the No-Action Letter is valuable but not exactly aligned with what financial institutions and service providers would like. (There’s only been one No Action Letter so far.) According to the research, they wanted a “regulatory sandbox.”
Enter Project Sandbox, a proposal to create a so-called “regulatory sandbox.” Financial institutions looking to test the regulatory impact of new products and services would be able to join Project Sandbox, understand the regulatory implications, and share data with the Bureau without fear of regulatory enforcement. You can read the proposal here.
While it’s interesting to see the CFPB take a serious approach to fostering innovation and a proactive approach to regulatory relief, the success of Project Sandbox will really hinge on its execution.
7. There is still a long way to go in building relationships with FinTechs.
It is clearly one of the Bureau’s goals to connect more effectively and more proactively with FinTech companies in order to encourage innovation in financial services. However, there is still a ways to go.
Project Sandbox does present a unique opportunity to foster those relationships. It’s been a really successful approach in Europe, in particular, and in certain industries in the US like healthcare. Unfortunately, the language used to describe the project barely mentions FinTechs.
The No Action Letters present another valuable opportunity to connect with FinTechs and foster a transparent, proactive, and compliant marketplace. However, as mentioned above, only one FinTech has received a No Action Letter.
Any efforts to encourage innovation needs to consider the role of FinTech companies. It appears that the CFPB is not quite there yet.