Regulators Sharpening Focus on Redlining
Under the Biden administration, there has been a renewed focus on fair lending issues, with particular attention to concepts of equity and equality in banking and combatting redlining. Regulators are looking at a bank’s Reasonably Expected Market Area (REMA) – i.e., where a bank could be reasonably be expected to have marketed and provided credit – rather than just the bank’s assessment area. Regulators will evaluate HMDA data on applications received and lending in majority-minority census tracts (MMCTs) as compared to other lenders, and disproportionately lower levels will raise concerns. Regulators will rely on statistical analyses of peer performance, as well as marketing and outreach efforts, to support inference of disparate treatment on the basis of race.
While neither the Equal Credit Opportunity Act (ECOA) nor the Fair Housing Act (FHA) use or define the term “redlining,” courts and agencies have generally interpreted redlining to include the following:
- Having different marketing or lending practices for certain geographic areas, compared with others, when the purpose or effect of such differences would be to discriminate on a prohibited basis;
- Treating applicants for credit differently on the basis of differences in the racial or ethnic composition of their respective neighborhoods;
- The avoidance of segments of the market area in providing products and services; and
- Reverse redlining involving a high percentage of loans with less advantageous features in MMCTs.
Recent settlements have highlighted practices in which institutions appeared to avoid predominantly Black and Hispanic neighborhoods, concentrated branches in majority-White neighborhoods, and avoided outreach and marketing to predominantly Black and Hispanic neighborhoods. Red flags for elevated redlining risk specifically for marketing include things like limiting marketing to current customers, limiting to zip codes not having MMCTs, and limiting diversity people featured in marketing materials. To prepare for the increased scrutiny on redlining issues you’ll want to take the following proactive steps:
- Assess the shape of your assessment area to make sure you’re not excluding majority-minority neighborhoods;
- Review the locations of your branches and loan officers, and avoid only taking a part of a county, rather than the entire county;
- Look into marketing and outreach efforts to reach majority-minority areas;
- Evaluate your specific policies and training;
- Compare your performance to that of your peers, understanding that in big cities you could be compared to any lender in the entire metropolitan statistical area (MSA);
- Periodically monitor data for potential fair lending and redlining risks, rather than wait for the next compliance examination;
- Include data comparisons to benchmarks (census and peer group), in addition to a more traditional review of application and origination numbers;
- Be prepared to proactively demonstrate which entities should be considered peers and how the institution’s data compares with those entities;
- Proactively engage in outreach and marketing that incorporates the monitoring results and is tailored to reach all an institution’s assessment area and REMA; and
- Affirmative marketing initiatives specific to MMCTs, with particular focus on marketing and outreach in areas that could close any MMCT tract holes.
There are many ways in which banks could evaluate or update their approach to combating redlining, and because of that you may have questions about policies, procedures, or practices, and we’re here to assist. Reach out to us on the hotline with any questions you might have about redlining or related topics and we’ll help you improve your processes.
Timing of Initial and Continuing SARs
It can be somewhat difficult to keep up with the requirements for filing Suspicious Activity Reports (SARs), despite the rules not changing all that often. Suspicious activity reporting is addressed in the Bank Secrecy Act regulations published by FinCEN, the FDIC, the FRB, and the OCC. The SAR regulations published by these four agencies are substantially similar, with the ones published by the regulators (FDIC, FRB and OCC) being slightly broader in scope and requiring SARs to be filed for instances of insider abuse as well as requiring the institution’s board of directors to be notified when a SAR has been filed. Regardless of who an institution’s federal regulator is, every institution is subject to both their regulator’s SAR regulations, as well as FinCEN’s SAR regulations.
The timing requirements of all the SAR regulations are the same: a bank is required to file a SAR no later than 30 calendar days after the date of initial detection by the bank of facts that may constitute a basis for filing a SAR. If no suspect is identified a bank may delay filing a SAR for an additional 30 calendar days to identify a suspect. In no case shall reporting be delayed more than 60 calendar days after the date of initial detection of a reportable transaction.
For the specifics of filling out SARs and for supplemental information like what to do when additional information is obtained and a SAR needs to be amended, or when the bank files a SAR with incorrect information, and a corrected SAR needs to be filed, we look to the SAR Filing Guide published by FinCEN. Additionally, this guide includes information about filing continuing SARs when the suspicious activity continues beyond the initial SAR filing.
According to the guidance, continuing SARs should be filed on successive 90-day review periods until the suspicious activity ceases, but may be filed more frequently if circumstances warrant it. Banks have up to 30 days following the end of a review period to file the continuing report for a total of 120 days of review and filing deadline. Although continuing SARs are filed for any suspicious activity that continues beyond the initial SAR filings, we most often receive questions about continuing SARs in relation to marijuana-related businesses (MRBs), as continuing SARs will be likely required on MRB customers for the duration of their relationship with the bank.
A question that arises often is related to the optional more-frequent-than-90-day-filing of continuing SARs and whether filing before the end of the 90-day review period “resets” the clock for continuing SARs. Although the guidance is not explicit about the requirements for this, conservatively any filing of a continuing SAR should reset the clock for subsequent SAR filings. So, for example, if a SAR is filed and the same suspicious activity continues after that filing, a continuing SAR would be required to be filed no later than 120 days after the initial filing. However, if a bank doesn’t wait 120 days, and files after 60 days, when is the next continuing SAR required (assuming the activity continues): in 60 days, or in 120 days? Conservatively the clock would be reset, and the next SAR would be required 120 days after the most recent continuing SAR.
We know that in addition to SAR filings not being easy, not every scenario is specifically addressed in the regulation or guidance. Feel free to reach out to us on the hotline to discuss or walk through questions you have on SAR filings or anything else that arises.
Unfairly Reopening Accounts
The CFPB (Consumer Financial Protection Bureau) recently issued Consumer Financial Protection Circular 2023-02 addressing reopening deposit accounts that consumers have previously closed. In this circular, the CFPB evaluates the following question: if a financial institution unilaterally reopens a deposit account closed by a consumer in order to process a debit or deposit, could it constitute an unfair act or practice? According to the CFPB the answer is yes.
Account agreements often give the bank the option to honor or return any debits or deposits to the account after closure. Sometimes after a consumer goes through the somewhat time-consuming process to close an account, a financial institution will unilaterally reopen the closed account if it receives a debit or deposit. The CFPB seems to be particularly critical of reopening an account when doing so overdraws the account, which then causes the imposition of overdraft and NSF fees. Some financial institutions have also been noted to charge maintenance fees after reopening, even in instances where the customer’s account previously had such fees waived.
The CFPB has recently brought an enforcement against a financial institution engaged in an unfair practice by reopening consumer-closed deposit accounts without seeking prior authorization or providing timely notice. These practices resulted in hundreds of thousands of dollars in fees charged to consumers. The CFPB concluded that the institution’s practice of reopening consumer accounts without obtaining consumers’ prior authorization and providing timely notice caused substantial injury to consumers that was not reasonably avoidable or outweighed by any countervailing benefit to consumers or to competition.
In their analysis section of the circular, the CFPB breaks down the three elements of unfair acts or practices: 1) it causes or is likely to cause consumers substantial injury, 2) that is not reasonably avoidable, and 3) the injury is not outweighed by countervailing benefits to consumers or to competition.
1) Substantial injury. This includes monetary harm, such as fees paid by consumers. Actual injury is not required, and the significant risk of harm is sufficient. Substantial injury can also happen when a small harm is imposed on a significant number of consumers, similar to how class-action lawsuits can bring relief to a class of consumers who all received some small injury.
A financial institution’s act of unilaterally reopening an account may cause monetary harm to the consumer. Further, if the account is overdrawn and not repaid timely, the institution may furnish negative information to consumer reporting companies, which may make it harder for the consumer to obtain a deposit account in the future. In addition to fees, reopening an account may increase the risk of unauthorized access to the account and fraud.
2) Consumers likely cannot reasonably avoid this injury. An injury is not reasonably avoidable when consumers cannot make informed decisions or take action to avoid the injury. Injury that occurs without a consumer’s knowledge or consent, when the injury cannot be anticipated or avoided, is not reasonably avoidable.
Consumers often cannot control third party attempts to debit or deposit money, for example, a consumer’s employer may accidentally send their paycheck to the closed account, even if instructed otherwise. Consumers also normally do not control the process and timing of account closures, and with the multiple steps involved a consumer cannot reasonably know how long it will take to fully close out the account, making it more difficult to prevent debits and credits that will reopen the account. Additionally, consumers generally do not have the ability to negotiate the terms of account agreements, and according to the CFPB even if these agreements reference these practices, consumers can be harmed by the lack of control they have in these circumstances.
- This injury is likely not outweighed by countervailing benefits to consumers or competition. As the CFPB puts it, reopening a closed account does not appear to provide any meaningful benefits to consumers or competition, as banks may have alternatives that could minimize any expenses incurred by not reopening these accounts.
Based on the CFPB’s own words, institutions would be best to avoid reopening accounts closed by consumers without the consumer’s knowledge and consent. What if an account is reopened without knowledge or consent, but there is no monetary harm to the consumer? This still isn’t recommended because the CFPB states that actual harm is not required and only a significant risk of harm is sufficient for it to be considered an unfair act or practice.
What then of accounts closed by consumers that are reopened with the consumer’s knowledge and consent? At present reopening with a consumer’s knowledge and consent seems acceptable. With this circular the CFPB has signaled a shift in how they’re viewing unfair acts and practices, so should you have any questions about this circular, the effects of account closings and reopenings, or anything else, feel free to reach out to us on the hotline.
Proposed Reg Z Revisions for PACE Financing
As sometimes is the case, it takes years for regulations authorized by legislation to actually be published by regulators. A recent example of this is the Section 1071 final rule which took more than 10 years to move from legislation (Dodd-Frank: 2010) to regulation (Subpart B of Regulation B: 2023). An even more recent example involves a new proposed rule originating out of Section 307 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA or S.2155), passed in 2018. Comments must be received on or before July 26, 2023, or 30 days after publication in the federal register, whichever is later.
Section 307 requires the CFPB to issue regulations requiring creditors to assess a borrower’s ability to repay PACE (Property Assessed Clean Energy) financing home improvement loans. PACE financing programs allow state and local governments to issue bonds and use the funds raised to finance energy efficiency and renewable energy projects. The proceeds from PACE bonds are loaned to property owners, who use the funds to invest in energy efficient upgrades or renewable energy projects. The loans are added to property tax bills through special assessments and paid off over time.
The proposed rule offers significant changes to Regulation Z and would:
- Clarify the Regulation Z commentary’s exclusion to the definition of “credit,” for tax liens and tax assessments to apply only to involuntary tax liens and involuntary tax assessments.
- Make adjustments to Loan Estimates and Closing Disclosures that would apply when those disclosures are provided for PACE transactions, including:
◊ Eliminating certain fields relating to escrow account information;
◊ Requiring the PACE transaction and other property tax payment obligations to be identified
as separate components of estimated taxes, insurance, and assessments;
◊ Clarifying certain implications of the PACE transaction on the property taxes;
◊ Requiring disclosure of identifying information for the PACE company;
◊ Requiring various disclosures for PACE transactions that would replace disclosures on the current forms,
including disclosures relating to assumption, late payment, servicing, partial payment policy,
and the consumer’s liability after foreclosure; and
◊ Clarifying how unit-periods would be disclosed for PACE transactions.
- Provide new model forms for the Loan Estimate and Closing Disclosure, specifically designed for PACE transactions.
- Exempt PACE transactions from the requirement to establish escrow accounts for certain higher-priced mortgage loans.
- Exempt PACE transactions from the requirement to provide periodic statements.
- Apply Regulation Z’s ability to repay (ATR) requirements in to PACE transactions with a few adjustments, including requiring PACE creditors to consider certain monthly payments that they know or have reason to know the consumer will have to pay into the consumer’s escrow account as an additional factor when making a repayment ability determination for PACE transactions extended to consumers who pay their property taxes through an escrow account.
- Provide that a PACE transaction is not a qualified mortgage (QM).
- Extend the ATR requirements and the liability provisions of TILA to any “PACE company,” that is substantially involved in making the credit decision for a PACE transaction.
- Provide clarification regarding how PACE and non-PACE mortgage creditors should consider pre-existing PACE transactions when originating new mortgage loans.
The CFPB proposes that the final rule, if adopted, would take effect at least one year after publication of the final rule in the Federal Register, so with the comment period running until at least the end of July, don’t expect an effective final rule until late next summer (2024) at the earliest. In the meantime, if you have any questions about this or other regulatory changes, don’t hesitate to contact us on the hotline.
CFPB Provides an Update on LIBOR
At the end of April 2023 the CFPB published an interim final rule to reflect the enactment of the Adjustable Interest Rate (LIBOR) Act (LIBOR Act). This rule addresses the planned cessation of most U.S. Dollar LIBOR tenors after June 30, 2023, by incorporating the benchmark replacement for consumer loans into Regulation Z. This interim final rule conforms the terminology from the LIBOR Act into relevant open-end and closed-end credit provisions in Regulation Z, and also addresses treatment of the 12- month USD LIBOR index and its replacement index, including permitting creditors to use alternative language in change-in-terms notices in situations where the 12- month tenor of the LIBOR index is being replaced consistent with the LIBOR Act. The effective date of the interim final rule is May 15, 2023, but the CFPB invites comment up until 30 days after the rule is published in the federal register.
Introduced in the 1980s, LIBOR (London Interbank Offered Rate) was intended to measure the average rate at which a bank could obtain unsecured funding for a given period. In the US, financial institutions have used LIBOR as a common benchmark rate for a variety of adjustable-rate consumer financial products, including mortgages, credit cards, HELOCs, reverse mortgages, and student loans. Because of the role LIBOR played in the 2008 financial crisis, it was decided that LIBOR would be phased out over time, and that time ends in June 2023 when the 1-month, 3-month, 6-month, and 12-month LIBOR rates will cease to be published. The need to address upcoming LIBOR changes was included as part of the 2010 Dodd-Frank Act, with previous and current changes to Reg Z regarding LIBOR being done under that authority.
Previously, in the 2021 LIBOR Transition Final Rule, the CFPB provided examples of certain Secured Overnight Financing Rate (SOFR)-based indices, that may meet the applicable Regulation Z standards for the 1-month, 3-month, and 6-month LIBOR tenors, but reserved judgment for the 1-year LIBOR tenor and its SOFR-based replacement index in order to gather more information and wait to see what the Alternative Reference Rates Committee recommended. In this newly released interim final rule, the CFPB is now also adding references to the SOFR-based replacement for the 12-month tenor of LIBOR.
The interim final rule checks in at 138 pages with about 90 pages being substantive discussion of the changes and nearly 50 pages of actual changes to the regulation. For quicker reference, the CFPB has also published a 3 page Fast Facts: 2023 LIBOR Transition Interim Final Rule, which should be helpful in quickly digesting the specific changes and to which products they apply.
The CFPB also updated several of the LIBOR Transition FAQs on their website, which cover such areas as consumer financial products and services, adjustable-rate mortgage products, private student loan products, home equity line of credit products, and credit card products.
Although these changes have been a long time coming, not everyone has yet made the necessary changes to transition their borrowers away from LIBOR to another index, and Compliance Alliance is here to help. We have tools to help with the LIBOR transition, and we’re also available on the hotline to answer whatever questions you might have.