To Consider or Not to Consider? Immigration Status under the ECOA
The CFPB and Department of Justice (âAgenciesâ) issued a joint statement (âStatementâ) on the potential civil rights implications that can arise when a creditor considers an individualâs immigration status under the Equal Credit Opportunity Act (ECOA). Technically, a creditor may consider immigration status when necessary to ascertain rights regarding repayment. The Statement, however, makes clear that creditors need to be aware that âunnecessary or overbroad reliance on immigration status in the credit decisioning processâ can give rise to potential violations of the ECOAâs antidiscrimination provisions.
The ECOA and its implementing Regulation B apply to all types of credit, including both personal and business credit. These rules generally prohibit discrimination in any aspect of a credit transaction on the basis of race, color, religion, national origin, sex (which includes sexual orientation and gender identity), marital status, age, receipt of public assistance, or the good faith exercise of rights under the Consumer Credit Protection Act.
While immigration status is not a prohibited basis under the ECOA and Reg B, they do prohibit the use of immigration status to discriminate on the basis of national origin, race, or any other protected characteristic, which can all be closely tied to immigration status. Reg B provides one specific example of consideration of immigration status relating to repayment, indicating that:
âa creditor may consider [an] applicantâs immigration status or status as a permanent resident of the United States, and any additional information that may be necessary to ascertain the creditorâs rights and remedies regarding repayment.â
The Statement importantly highlights that Reg B does not provide a safe harbor for all consideration of immigration status so you cannot take the above quote and the fact that immigration status is not an express prohibited basis to mean there is a blanket acceptance of the use immigration status in credit decision making.
The main issue highlighted in the Statement is that immigration status may overlap with or serve as a proxy for protected characteristics, like national origin or race. The Statement is clear that if consideration of immigration status is not ânecessary to ascertain the creditorâs rights and remedies regarding repaymentâ and it results in discrimination on a prohibited basis, it violates the ECOA and Reg B. This includes reliance on citizenship status or âalienageâ (i.e., an individualâs status as a non-citizen). For example, a blanket policy of refusing to consider applications from certain groups of noncitizens, regardless of their credit qualifications, may risk violating the ECOA and Reg B.
In addition, overbroad consideration of certain criteria â such as how long a consumer has had a Social Security Number â may serve as a proxy for citizenship or immigration status, which in turn, may implicate a protected characteristic like national origin or race. Similarly, requiring documentation, identification, or in-person applications only from certain groups of noncitizens may violate the ECOA and Reg B.11
Junk Fee Highlights
Last week the CFPB released a new issue of its Supervisory Highlights which is an update of its Spring Highlights on âjunk fees.â The report discusses recent CFPB examination findings involving fees in the areas of deposits, auto servicing, and remittances. In its introduction, the CFPB notes a few general shifts in banking over the last year: âMultiple banks have announced they were eliminating overdraft fees or otherwise updating their policies to be more consumer friendlyâ and that many banks have also announced they are eliminating non-sufficient (NSF) fees on consumer deposit accounts. The bulk of the highlights discuss deposit practices. Key findings include:
- Core processors engaged in an unfair act or practice by contributing to the assessment of unfair NSF fees on re-presented items. Specifically, when platforms do not allow banks to refrain from charging more than one NSF fee per item without discontinuing NSF fees altogether or manually waiving individual fees. To address these findings, the core processors enhanced their systems to facilitate their implementation of policies to eliminate NSF re-presentment fees.
- Financial institutions were found to have engaged in unfair acts or practices by charging consumers re-presentment NSF fees without affording the consumer a meaningful opportunity to prevent another fee after the first failed representment attempt. Notably, unlike the OCC and the FDIC, the CFPB has not issued any separate formal guidance indicating that charging multiple representment fees could be an unfair or deceptive act or practice.
- Financial institutions engaged in unfair acts or practices by charging Authorize-Positive Settle-Negative (APSN) overdraft fees. To remedy the violation, these institutions ceased charging APSN overdraft fees, and will conduct a lookback and issue remediation to injured consumers.
- Financial institutions engaged in an unfair act or practice by assessing paper statement fees and returned mail fees for paper statements they did not attempt to print and deliver. These institutions had charged fees for the printing and delivery of paper statements, including additional fees when they mailed a statement that was returned undelivered.
Examiners also found that auto servicers engaged in unfair acts or practices by failing to ensure that consumers received refunds for add-on products following early loan termination or used miscalculated add-on product refund amounts after loans terminated early. These miscalculations were due either because servicers used the wrong amount for the price of the add-on product or because they deducted fees (such as cancellation fees) that were not authorized under the add-on product contract.
Lastly, examiners found that certain remittance transfer providers violated the remittance regulations by failing to appropriately disclose fees or failing to refund fees, in certain circumstances, because of an error. Remittance transfer providers are required to disclose any transfer fees imposed by the provider. In the case of an error for failure to make funds available to a designated recipient by the date of availability, the provider must refund to the sender any fees imposed, and to the extent not prohibited by law, taxes collected on the remittance transfer. Examiners found that certain providers failed to correct errors by refunding fees imposed on the remittance transfer, within the specified time frame, where the recipients did not receive the transfers by the promised date.
For more information on junk fees, be sure to register for our November webinar âOverdraft, NSF, and âJunkâ Fees, Oh My: An Updateâ where we will provide an overview of the various junk fee related guidance released since the summer of 2022 and assess the current regulatory landscape.
OCC Sets Supervisory Objectives for New Fiscal Year
The beginning of October marked the start of the Office of the Comptroller of the Currencyâs (OCCâs) new fiscal year. To ring in the new fiscal year the OCCâs Committee on Bank Supervision (CBS) recently released an operating plan setting forth the OCCâs supervision priorities and objectives for the coming year. It is a useful tool for national banks to get into the minds of their regulators and examiners and see where they may place particular emphasis come exam time. Even for those not supervised by the OCC, some of these may be indicators of what the other agencies are prioritizing as well.
Given the bank failures of the last year, such as Silicon Valley Bank, it is not surprising that the first noted priority objective is asset and liability management. Examiners are asked to determine whether or not banks are managing their interest rate and liquidity risks through use of effective asset and liability risk management policies and practices, such as stress testing and contingency planning. Supervisory focus will also include back-testing practices to assess whether models performed accurately during recent stress events. Contingency funding plans will also be reviewed to determine whether banks have adequate operational readiness to access contingent funding sources, effective monitoring of established borrowing lines, good collateral management practices, and the ability to access contingency liquidity sources in an efficient and timely manner.
Significant attention was also given to cybersecurity. Cybersecurity, incident response, and data recovery were all listed as supervisory focal points because of the continued evolution and volatility of cyberattacks. Banks should make sure they are conducting regular cybersecurity assessments and actively identifying weakness and areas of concern and then apply those results to future practices. Particular emphasis was given to operational resilience capabilities that enable recovery from disruptive and destructive attacks, such as ransomware. It also indicates that banks need to make sure their incident response plans and third-party risk management policies are up-to-date and working effectively.
Consumer compliance was another stated objective. Examiners will focus on banksâ compliance risk management systems for new or innovative products, expanded services, and delivery channels offered to consumers or that involve products or services offered through third-party relationships, including those with fintechs or through banking-as-a-service activities. No one was surprised that the OCC noted unfair, deceptive, or abusive acts or practices relating to overdrafts, âauthorized positive, settle negative,â and multiple re-presentment fees given the intense regulatory scrutiny of such fees over the past year by the OCC and other regulators. Banks need to ensure that their disclosures related to any such practices are up-to-date and that practices are in line with what has been disclosed to your customers.
Other areas of focus noted in the operating plan include credit, allowance for credit losses, operations, distributed ledger technology, change management, payments, BSA/AML, CRA, fair lending, and climate-related financial risks.
CBSâs operating plan can be reviewed at the following link: Fiscal Year 2024 Bank Supervision Operating Plan The OCC intends to provide periodic updates about supervisory priorities and emerging risks in its âSemiannual Risk Perspectiveâ reports, typically released in the fall and spring on each year.
More 1071 Injunction News
A federal judge in Kentucky recently issued a nationwide injunction blocking enforcement of the Consumer Financial Protection Bureauâs (CFPBâs) Section 1071 final rule (the âFinal Ruleâ) until the U.S. Supreme Court (SCOTUS) rules on the constitutionality of the CFPBâs funding structure in a separate pending case. The injunction is distinct from a similar order issued by a Texas judge in July, which only applied to Texas Bankers Association (TBA) and American Bankers Association (ABA) members, including co-plaintiff Rio Bank.
At the end of May, TBA, Rio Bank, and the ABA asked the U.S. District Court for the Southern District of Texas to issue an injunction halting implementation of the Final Rule. This request was granted delaying implementation only for member banks of the plaintiffs. ABA and TBA asked for a nationwide injunction in their lawsuit, but the Judge sided with the CFPB in limiting the order only to members of both groups. Afterwards, TBA and the ABA urged the CFPB to voluntarily pause enforcement of the rule while SCOTUS considers the case on the constitutionality of the CFPBâs funding. SCOTUS is scheduled to hear oral arguments in that case October 3, with a ruling expected spring 2024 but no later than June 2024. At a minimum, the injunction extends Sec. 1071 compliance dates for TBA and ABA members for the stayed period.
In Kentucky, the state bankers association and several banks operating in-state filed suit in the U.S. District Court for the Eastern District of Kentucky arguing that because the CFPB issued the Final Rule with funds derived from unconstitutional sources, the Final Rule itself violates the Constitution. The plaintiffs then moved for a preliminary injunction to enjoin the CFPB from implementing and enforcing the Final Rule. The court granted the plaintiffsâ motion, but its impact seems more limited than the ruling out of Texas. As the court conceded, â[b]efore the [Final] Rule becomes enforceable, a decision on the merits will be issued by the highest Court in the land. A preliminary injunction will create no harm to the CFPB nor the public since the [Final] Rule would not otherwise be enforceable in the interim.â
While this is ultimately subject to legal interpretation, the result is a seemingly all-inclusive, nationwide injunction against enforcement of the Final Rule until the SCOTUS ruling slated for spring of 2024. It’s important to note that this case is not the same as the TBA case. Unlike the injunction entered in Texas, the Kentucky order does not delay the compliance date for the Final Rule for the duration of the courtâs injunction, but with an October 2024 compliance date falling after the expected ruling from SCOTUS this may have little impact. It also remains to be seen whether or not the CFPB will try to take either decision up on appeal.