Inside the CFPB Fair Lending Report 2023

What Lenders Should Know About Fair Lending Compliance in 2023

In 2022, the Consumer Financial Protection Bureau increased fair lending examinations by 146%. Their report released in June 2023 shows that the CFPB opened 32 fair lending examinations and targeted reviews last year.  

Expect this number to rise. 

The CFPB is actively investigating potential discrimination across mortgage originations, student lending, payday lending, credit cards, and small business lending. They have begun to evaluate financial institutions’ automated systems and lending models, determining if these systems produce biased lending practices targeting vulnerable populations. 

These investigations have resulted in enforcement actions, MRAs, and MOUs.  

Below, we will highlight what bank and non-bank lenders must know about data collection and Fair Lending compliance from the 2023 Fair Lending Report of the Consumer Financial Protection Bureau.

6 Key Insights from the 2023 CFPB Report

1. ECOA Protections for Existing Consumers

The CFPB and other agencies cited 174 institutions for violations of the Equal Credit Opportunity Act (ECOA) and/or Regulation B.   

CFPB: Discrimination; adverse action

FDIC: Inquiring about a protected class; adverse action; appraisals and valuations 

Federal Reserve: Discrimination; adverse action; appraisals and valuations 

NCUA: Discrimination; use of information; adverse action 

OCC: Discrimination; adverse action; record retention; appraisals and valuations 

As a reminder, the CFPB issued an advisory opinion that ECOA and Regulation B protect current borrowers, as well as loan applicants. Creditors need to provide their current consumers with a notice of adverse action taken against them, which includes revoking existing credit or changing the terms of a loan. These citations are a reminder that regulators are looking closely at this area.  

2. Justice Department Referrals 

The FDIC, NCUA, Federal Reserve, and CFPB referred 23 suspected cases of ECOA discrimination violations to the Justice Department (DOJ) in 2022 – up 91 percent from 2020. The FDIC referred 12 fair lending matters to DOJ, including discrimination on the basis of national origin, sex, public assistance payments, race, marital status, and age. The CFPB referred five cases related to mortgage lending, the NCUA referred five cases related to consumer loan underwriting, and the Fed referred one based on discrimination on mortgage loans based on marital status. 

3. Quality Control for AVMs 

Automated Valuation Models (AVMs) will come under greater scrutiny according to the 2023 CFPB report.  Partnering with agencies, including the Federal Reserve Board, the OCC, FDIC, NCUA, and FHFA, the Consumer Financial Protection Bureau will address the potential for fair lending risk in AVMs. The CFPB requires covered institutions to institute policies, procedures, and controls so their risk models comply with nondiscrimination statutes. 

4. Consumer Notification of Loan Denial Requirements

Even lenders relying on credit risk models in approving and denying loan applications must inform applicants of the specific reason their loan was denied. The CFPB maintains that financial protection laws, including adverse actions, must be more comprehensive than an algorithm. 

Defending noncompliance with the ECOA because of a risk model's technological output is insufficient for regulatory compliance. Lenders need a dedicated compliance and fair lending solution in addition to their AVMs.

5. Compliance for Third-Party Marketing Vendors

The CFPB does not make an exception for third-party service providers in marketing for failure to comply with financial protection laws, the CFPB reminded lenders in the report. According to the agency, marketing vendors “acting as service providers” are liable for any unfair, deceptive, or abusive practices that cause a disparate impact on potential borrowers.

6. Increasing Consumer Reporting Requirements

On March 30, 2023, the CFPB issued a final rule amending Regulation B that covered changes made to ECOA by section 1071 of Dodd-Frank. This rule requires covered financial institutions and lenders to collect and report credit applications for small businesses, including those owned by women or minorities. 

Generally speaking, bank and non-bank lenders of a certain lending threshold must manage, report, and analyze more compliance data in 2023. 

What Lenders Can Do to Prepare for New CFPB Guidance

Establish a Strong Compliance Management System: Every CFPB examination will assess a lender’s compliance management system (CMS). The agency offers guidance on what a robust CMS includes: 

• Having a board of directors and leadership structure that clearly defines accountability in lending compliance
• Initiating lending compliance programs with policies, procedures, consistent monitoring, employee training, and remediation
• Tracking and responding to individual consumer complaints, as these may indicate a broader trend of fair lending noncompliance at an institutional level
• Completing internal audits regularly and apprising management of any potential issue
  

Related: What Is a Fair Lending Compliance Management System? 

Avoid Common HDMA Errors 

The HDMA errors that examiners uncover that lenders don’t typically result from a poor (or non-existent) compliance management solution. 

While errors can be as simple as an employee’s data entry mistake, others such as inaccurate census tracking and incorrect rate spreads, result from a lack of strong internal controls and systems. 

Sometimes HDMA violations occur due to inadequate vendor management. 

Employing a third-party loan processing servicer presents compliance risk if they fail to accurately transfer data such as debt-to-income ratios.

Related: 4 Key Stages of Your HMDA Data's Yearly Lifecycle

What Comes Next in Fair Lending Compliance?

It is clear from the emphasis of the 2023 CFPB report that the agency is worried about fair lending compliance risk posed by advanced data analytics and technologies that don’t specifically address compliance. “Vast troves of consumer sensitive data are fueling highly complex black box algorithms” in lending, according to the report. 

The problem is not with financial services technology but with what the technology measures. Lenders cannot simply set their AVMs and marketing programs on autopilot. From the CFPB’s perspective, that is the recipe for a fair lending enforcement action. 

Banks and non-bank lenders need a fair lending management solution that analyzes the correct data points. They require a flexible and scalable system that enables them to analyze more data points as their compliance requirements evolve.

Consumer lenders require platforms that generate accurate and timely fair lending performance reports to satisfy examiners. The CFPB’s most recent report serves as a reminder of why those engaged in consumer lending should develop an efficient solution for fair lending audits internally.

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