July 20, 2020|CFPB, Fair Lending, Regulation by Enforcement
CFPB’s first fair lending lawsuit
The CFPB recently filed suit last week against a small mortgage lender in Chicago named Townstone Financial. To my knowledge, this is the first fair lending lawsuit ever filed by the agency.[1] The allegations are already being vigorously countered by attorneys experienced in Constitutionally protected commercial speech issues because, among other things, the lender is accused of making disparaging remarks on his radio program. Among other things, CFPB claims the comments discouraged minority applications. While I am intrigued by the freedom of speech issues (and they may play into my conclusions), that is not the issue I am going to talk about here.
Regulation by enforcement = Pushing the envelope[2]
In 2016, while Richard Cordray was still in charge at the CFPB, Mortgage Banker Magazine published my article about the misuse of the CFPB’s enforcement powers to extend regulations, specifically RESPA. That penchant by the first group of CFPB enforcers was known as “regulation by enforcement”. During that era, CFPB looked to establish new regulatory requirements through Consent Orders and other unilateral pronouncements[3] without the need to follow the constitutionally required “notice and comment” due process administrative procedures that protect citizens from unaccountable government agency action[4].
The end of CFPB envelope pushing?
I thought we had put the CFPB’s regulation by enforcement activity behind us in 2018 when 1) Mick Mulvaney replaced Richard Cordray at CFPB, and 2) the DC Circuit’s decided the PHH case[5]. Mulvaney said that he wasn’t going to “push the envelope” and shut down CFPB efforts to reinterpret laws through enforcement actions and consent orders. Then, the PHH decision (written by then DC Circuit Judge Brett Kavanaugh) chastised the CFPB for changing its interpretations of RESPA without due process and in ways that were wholly inconsistent with the plain language of the law. Likewise, her first official day in office, Trump appointee Kathleen Kraninger announced she had the same reservations about using enforcement actions to regulate the financial services industry that Mulvaney did. “Regulation by enforcement certainly is pushing the envelope,” she told reporters.
Pushing the envelope again?
Well, based on the claims against Townstone, it appears once again the CFPB is pushing the envelope through enforcement; this time in the area of fair lending. The CFPB’s complaint lists a number of descriptions of certain neighborhoods made on the radio show and other statements which the CFPB alleges had the effect of discouraging applications[6] The nature, context and impact of these statements will likely be contested factually. However, another claim raised by the CFPB was that the lender violated fair lending laws because he only advertised on conservative radio.
While there have been previous fair lending consent orders requiring diverse community outreach as part of the remedial plan[7], the CFPB did not allege that Townstone discriminated or denied credit to consumers directly, but rather discouraged applications via commentary on a radio show and its choice of advertising medium. CFPB’s complaint appears to be arguing that even a small nonbank[8] like Townstone has an affirmative obligation to advertise to the full spectrum of community interests.
Fair lending laws simply don’t say that
Compliance folks are debating how to react to this case (see footnote 3 below), but an affirmative obligation to advertise to all segments of a community is simply nowhere to be found in the Fair Housing Act, Regulation B or any other source of fair lending requirements (and would be an impossible standard to meet in any event). The closest thing I can think of is the fair housing logo that must be included in advertisements. One has to wonder what to make of the utility of that old fair housing logo requirement now.
While encouraging broader outreach by all lenders (even small lenders) might be a good idea to help close the minority lending gap[9], the defense in the case is likely to argue that the CFPB’s concerns about discouraging applications are empirically invalid. Again, it seems clear that CFPB is seeking to expand the fair lending laws through enforcement. This affirmative broad advertising requirement is precisely the kind of thing that should go through the notice and comment process and not be “announced” as a surprise via an enforcement action as an asserted violation.
[1]Townstone is not the first fair lending enforcement action by the CFPB; just the first to be filed as a lawsuit rather than settled or otherwise dismissed.
[2] This isn’t a paper shuffling metaphor. It refers to test pilots “pushing the envelope” of what an airplane’s limits might be. Think Top Gun, not US Postal Service.
[3] In 2016 Cordray told a financial trade association that it would be “compliance malpractice” not to follow the “guidance” of the CFPB’s Consent Orders. In my view that was an inappropriate scare tactic admonishment by the top consumer financial regulator to the compliance community. The PHH decision noted in footnote 4 below concluded that if you had followed the RESPA “guidance” in the CFPB’s enforcement action against PHH, you would have actually misinterpreted RESPA just as Mr. Cordray and CFPB had. Sure, consent orders can tell you what the CFPB’s enforcement priorities are and how they might be interpreting something, but there is no constitutional, legal or malpractice basis to take a consent order’s “guidance” as an official interpretation of the law. See again my 2016 article here.
[4]See also, the recent Supreme Court decision in the Seila Law case.
[5]See PHH case here and footnote 2 in my last Musings.
[6]Discouraging applications is expressly prohibited in Reg B and its Official Commentary
[7]See, for example, the fair lending settlement reached with Hudson City Savings Bank in 2015.
[8]Banks are subject to the Community Reinvestment Act which imposes a duty to serve all elements of the bank’s defined market area.
[9]This is something that should not be assumed to work without empirical research. If it doesn’t move the needle, why force business to do it?