Does this $1.75M Fair Lending Consent Order Signal Changes in Compliance Enforcement?
June brought banking compliance professionals two Fair Lending actions, the first of such regulatory updates in months. Do these two regulatory actions signal a changing approach to Fair Lending compliance enforcement? Read on to find out.
If you're a banking compliance professional, you've probably noticed that Fair Lending enforcement activities have been few and far between in 2017 and 2018. Set against this backdrop, the two Fair Lending actions taken by regulators in June seem even more striking.
But do these two activities - one consent order and one settlement - signal a change in compliance priorities or regulatory enforcement?
Today we will focus on a $1.75M consent order between the CFPB and one of the nation's largest mortgage lenders.
Learn more about the changes to Fair Lending compliance taking place right now, and whether these Fair Lending actions signal changes in enforcement for your financial institution.
We want to make it clear that we understand how difficult Fair Lending compliance can be. We don't want to add to any negative press about these financial institutions, so we won't be calling them by name. Instead, we will be linking to materials released from the regulators, so that you can learn more about the details as you wish.
If Fair Lending compliance is a priority for your financial institution, know that we are here to help. We offer tons of free resources, as well as Fair Lending analysis software, consulting, CRA and HMDA transmittal, and much more.
Now, let's explore the details of these two Fair Lending actions.
$1.75M Consent Order with a Mortgage Company for Filing False HMDA Data
In early June, the CFPB filed this $1.75 million consent order with a New Jersey mortgage company for allegedly filing false HMDA data.
According to the consent order, the mortgage company "submitted mortgage-loan data for 2014, 2015, 2016, and 2017 that contained errors in violation of the Home Mortgage Disclosure Act (HMDA), 12 U.S.C. §§ 2801–2810, and its implementing regulation, Regulation C, 12 C.F.R. pt. 1003."
You might be thinking, "I thought there was a 'Good Faith Provision' in place for HMDA data submission this year! How can there be a consent order for wrong HMDA data?"
Well, you're right! There is a "Good Faith Provision" in place. (More on that in the video below!)
Despite the Good Faith Provision, the Bureau felt that the errors identified in this institution's HMDA data were substantial enough for a $1.75M consent order. We'll talk more about why next.
According to the Consent Order, the mortgage company had their loan officers filing inaccurate information, in some cases intentionally, from 2014-2017. It is our opinion that the Good Faith Provision doesn't apply in this case because the alleged errors took place over many years and do not appear to be related to challenges with implementing the new HMDA rule.
Here are a few more details on the allegations:
- The mortgage company's loan officers reported inaccurate race, ethnicity, and sex information intentionally from 2014 to 2017. During this time period, they were one of the top ten filers in the country, and reported the false information on more than one million loans.
- Their internal loan system was hardcoded to stop if HMDA information was missing, so loan officers were instructed by management to fill in any missing information in order to move the application forward.
- According to the consent order: "Respondent’s electronic system-of-record is a proprietary system called “Lakewood.” Loan officers in call centers collect and enter application information from consumers into an overlay to Lakewood also created by Respondent, called “Sales Portal.” However, if Lakewood detects that certain application information is missing, it is programmed to initiate a “hard stop” that prevents the file from advancing or being saved in Sales Portal."
- If the applicant or borrower didn't provide their demographic data, the loan officers were instructed to fill in "Non-Hispanic White."
- The CFPB identified this practice by listening to phone recordings, wherein they identified at least 125 applicants saying they didn’t wish to provide the information. When the CFPB went to validate the info on the LAR, they found out the information was not recorded as “I do not wish to provide.” This issue was allegedly identified in 7 call centers, and involved 80 loan officers.
- In a VA scenario, if the loan officer selected the “do not wish to provide, for sex,” the system would remove the co-applicant's income and not allow martial status to be saved by the system.
- From an equal treatment standpoint, this flaw would automatically discriminate against veteran. Removing important and relevant income data would likely have a big impact on approvals.
- Applicants sometimes called to complain that the information recorded was incorrect. However, the loan officers allegedly did not have access to data at this point in the process, and so could not correct the information. It appears that applicants were sometimes told that the inaccurate information could not be updated or changed.
The mortgage company has said that these inaccuracies did not have any negative impact on their customers, but is working closely with the CFPB to resolve the problems.
Based on the information we've seen, this $1.75M consent order for filing inaccurate HMDA data is the largest of its kind to date.
This consent order signals, to us at least, that HMDA data quality is a priority for regulators. Even if they are applying the good faith provision, it appears that they are actively evaluating the HMDA LARs being submitted, and checking the data for potential errors. Are you accurately collecting and filing your HMDA data?
As HMDA compliance specialists, we'd love to hear from you about your challenges and concerns to see if and how we can help.
Changes to Fair Lending Regulations on the Horizon
As we discussed in last week's post, there are a lot of potential changes on the horizon for Fair Lending compliance. Here is a really high-level overview of some of those potential updates:
- Fair Debt Collection Practices Act will be updated after 40+ years.
- HUD is also working on updating the Fair Housing Act, one of the cornerstones of Fair Lending compliance, and the CFPB is probably going to follow their lead.
- CRA modernization is still on the horizon, and regulators are working on a Joint Proposal. The Joint Proposal is expected later this summer.
- Redlining and REMAs remain a regulatory priority, as we've seen in recent weeks.
Bottom line: 2019 is shaping up to be a landmark year for Fair Lending reform.
Given the challenges presented by the recent HMDA changes, it's likely that these updates will shake up the industry. How will you prepare?
What Does This Fair Lending Action Mean For You?
The regulatory requirements of Fair Lending may be changing, particularly as the prospect of FHA and FDCPA changes are on the horizon. That said, the spirit of Fair Lending and the basic guidelines to follow have not changed. These recent Fair Lending actions mean that it's a perfect time to evaluate and strengthen your Fair Lending compliance management system.
Are you evolving to have three lines of defense in your CMS? What is your compliance culture like? Are you regularly analyzing and monitoring your data for Fair Lending risk, including CRA, HMDA, and Redlining? How are you handling complaints?
Having strong fundamentals in place for your compliance program is a great defense, especially as the regulatory landscape is changing.