The looming fair lending downpour: Time to start shopping for an umbrella?

With each passing year, the CFPB’s laser-like focus on fair lending issues has intensified. Two recent pieces of evidence aptly point this out: the proposed changes to Regulation C (HMDA) that would provide the agency with a host of additional ammunition to use against lenders, and the recent Department of Justice and CFPB actions in the subprime auto lending arena. The proposal and enforcement actions may leave many institutions wondering just how intense is this fair lending storm going to be?

Changes to HMDA

In accordance with requirements under the Dodd-Frank Act, the CFPB is proposing expansive changes to Regulation C that will broaden the scope of loans covered under the regulation’s reporting requirements and will significantly increase the amount of information regarding those loans that must be reported to the government. The proposed rule would require reporting data on all dwelling-secured loans, both closed-end and open-end loans, regardless of the loan purpose. This expansion would include data for all reverse mortgages and commercial lines of credit if they are secured by a dwelling. Lastly, the proposed rule would expand the reporting requirement for preapproval programs to include data on preapproval requests that are approved, but not accepted by the applicant. Reporting for these situations is voluntary under the current rule.

Under the proposed rule, financial institutions will be required to provide a host of new information. The new items include:

• Age of the applicants
• Credit scores of the applicants and the name and version of the scoring model
• Debt-to-income ratios
• Application channel (retail, wholesale or correspondent)
• Reasons for denial
• Whether an automated underwriting system was used, the name of the system and the system results/recommendations
• Construction method for the dwelling (i.e. site-built or manufactured housing)
• Whether a manufactured home is legally classified as real property or personal property under applicable state law and whether the borrower owns the land under the manufactured home
• Property value
• Lien priority
• Combined loan-to-value ratio (CLTV)
• Number of individual dwelling units in the property and the number of units that are income-restricted under a federal, state or local affordable housing program
• Use of the dwelling (principal residence, second residence, or investment property)
• Postal address for the property
• Type of loan, including whether the loan is a qualified mortgage
• Amount of any advance made at closing for open-end lines of credit
• Loan term, in months
• Interest rate at closing
• Introductory rate period, in months
• Total of all borrower-paid fees paid at or before closing
• The total of points paid to the creditor to reduce the interest rate, expressed as a dollar amount
• The interest rate the borrower would have paid if no points are paid
• Non-amortizing features, such as balloon payments or interest-only payments
• Prepayment penalty term, in months
• Whether a loan is a HOEPA loan due to its interest rate or due to its fees
• Universal loan identifiers
• Loan originator and legal entity identifier numbers

The CFPB acknowledges that reporting this additional data will be burdensome, but believes that aligning the required data, to the extent possible, to the widely used Mortgage Industry Standards Maintenance Organization (MISMO) standards used for residential mortgages will ease the burden. This, however, is little consolation to small lenders that don’t sell their loans on the secondary market and can anticipate how the CFPB intends to use this additional data for expanded fair lending analyses.

Now may be the time to run your institution’s numbers using the proposed categories to see if there are disparities that should be addressed before the probable implementation date (which some industry observers project to be Jan. 1, 2017).

Subprime Auto Lending

In other fair lending news, the CFPB is collaborating with the Department of Justice to go after abuses in the subprime auto lending market. Specifically, the DOJ is targeting General Motors Co. and has subpoenaed records dating from 2007 concerning the securitization of its subprime auto loans. It is all part of an investigation as to whether the company neglected to disclose the credit worthiness of their borrowers to investors (which is in violation of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989). However, according to a statement by GM Financial, no allegations have been made yet.

This action comes on the heels of an $80 million settlement of a discrimination claim against Ally Bank in its subprime auto lending program. The allegations were that Ally Bank was discriminating against minority borrowers by offering them higher interest rates than Caucasian borrowers.

This focus on auto lending is an indicator of the CFPB’s overall heightened interest in fair lending. Whether you’re an auto lender or simply concerned by the increased HMDA reporting requirements and the potential ammunition it gives the CFPB against your institution, it is critical to receive a fair lending audit annually. This audit can act like an umbrella, shielding you from the effects of the fair lending storm.