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National Association
of Federal Credit
Unions
Fair Lending Training
(Part II)
April 23, 2014
Jeremiah S. Buckley, Partner
Lori J. Sommerfield, Counsel
2
Order of Presentation
Key Players in Fair Lending Supervision, Examination
and Enforcement
CFPB and NCUA: Fair Lending Supervision &
Examination Process and Trends
10 Lessons Learned in the Examination Process
Q&A
3 3
Key Players in Fair Lending
Supervision, Examination and
Enforcement
4
Key Players
National Credit Union Administration (“NCUA”) supervises and examines federal credit unions with assets of less than $10 billion
The Consumer Financial Protection Bureau (“CFPB” or “Bureau”) supervises and examines credit unions with assets of $10 billion or more
The CFPB has primary responsibility for enforcing ECOA and HMDA, as well as rulemaking authority
– Laws are enforced through the CFPB’s Office of Supervision and Enforcement and Office of Fair Lending & Equal Opportunity
U.S. Dept. of Housing & Urban Development (“HUD”) continues to retain primary responsibility for enforcing the Fair Housing Act
Any “pattern or practice” of lending discrimination must be referred to U.S. Department of Justice (“DOJ”)
5 5
CFPB and NCUA:
Fair Lending Supervision &
Examination Process and Trends
6
CFPB:
Fair Lending Supervisory Guidance
CFPB – Fair Lending Guidance
– Bulletin 2012-04, Lending Discrimination (April 18, 2012)
– Bulletin 2013-02, Indirect Auto Lending and Compliance with the
Equal Credit Opportunity Act (March 21, 2013)
– Bulletin 2013-11, Home Mortgage Disclosure Act (HMDA) and
Regulation C – Compliance Management; HMDA Resubmission
Schedule and Guidelines; and HMDA Enforcement (Oct. 9, 2013)
Updates to CFPB Supervision & Examination Manual
– ECOA baseline review procedures (July 2013)
– HMDA resubmission schedule and guidelines (Oct. 2013)
– ECOA – appraisal and valuation requirements (June 2013 and Jan.
2014)
– Mortgage origination and servicing procedures (Jan. 2014)
7
CFPB:
Fair Lending Examinations
Fair lending is a component of every CFPB examination
Types of fair lending exams: – ECOA baseline review
– ECOA targeted review
– HMDA review
Bureau has its own set of examination procedures, but also “temporarily adopt[s]” Interagency Fair Lending Examination Procedures
Risk-based prioritization process. Factors include: – Fair lending complaints
– Public/private litigation
– Information from prior fair lending exams or enforcement actions
– Adequacy and quality of fair lending CMS Program
– Data analyses – Institution-specific and horizontal
– Insights, information & research (CFPB Markets group)
8
CFPB:
Fair Lending Examinations
Changes to CFPB’s examination process during 2013
– Enforcement attorneys no longer part of on-site exam team
Announced Oct. 9, 2013
Will continue to closely coordinate with examiners off-site
– Roll-up exams in progress; examination teams transferring to other institutions
– Responsible Conduct Guidelines – Supervision/pre-enforcement
Exam focus is both process- and product-oriented
– Compliance Management Systems (“CMS”) focus
Board and management oversight
Adequacy of written policies and procedures
Complaint management
Vendor management
– Products (risk-focused)
9
CFPB:
CMS Program Expectations
CFPB expectations for Fair Lending CMS:
– Fair lending policy statement;
– Regular fair lending training for all employees, officers and board;
– Ongoing monitoring for compliance with fair lending and other policies
and procedures that are intended to reduce fair lending risk;
– Review of lending policies for potential disparate impact;
– Regular analysis of pricing and underwriting data for potential disparities
on a prohibited basis;
– Regular assessment of the marketing of products; and
– Meaningful oversight of fair lending compliance by management and,
where appropriate, the board of directors
10
CFPB:
Product Focus Areas for 2014
Product focus areas for CFPB fair lending examinations
during 2014:
– Mortgage origination and servicing
– Auto finance
– Credit cards
– Student loan servicing
– Access to credit generally
11
CFPB:
Products - Mortgage
Mortgage origination – Discretionary exceptions to underwriting and pricing policies
– Redlining and CRA assessment areas
– Assessment of fees (including amount, timeline for collection, and circumstances for refunding)
– Policies and procedures governing, and communications to borrowers concerning, potential increases in payment obligations
– Cancellation of HELOCs, particularly in loss mitigation context
– Maternity and disability benefits discrimination
– HMDA data integrity
Mortgage servicing – Non-default servicing (payment processing, account maintenance,
insurance)
– Default servicing (collections, loss mitigation, foreclosure)
– Foreclosure practices (vendor oversight, pre-referral review, sufficient workout efforts)
– Fair servicing, including discretion in loss mitigation
12
CFPB:
Products – Auto Finance
Underwriting and pricing of auto loans – Discretionary dealer mark-up of buy rate
– Dealer compensation (participation)
Sales and marketing of auto loans
Deceptive marketing and sales of add-on products – Sale of extended warranties, extra insurance, and other ancillary
products
– Disclosure and benefit of terms/prices for add-on products
Evolving CFPB expectations include: – Portfolio-level fair lending statistical analysis
– Strong push for flat fee dealer compensation
– Recommendations for dealer fair lending training
– Robust plan for dealer price monitoring program
– Consumer remediation, if appropriate
13
CFPB:
Products – Credit Cards
Initial CFPB enforcement actions were against credit card
companies for deceptive sales and marketing of products
CFPB is now conducting targeted add-on products exams and
credit card fair lending examinations
– Marketing and sales of products
– Disclosures and notices to borrowers regarding the products
– Handling of claims for applicable products, including rates for
paying claims and reports for monitoring claims status
– Handling of cancellation and/or refund requests
– Compliance management, quality control, and product training
Also focused on prepaid cards, GPRs, and affinity card
relationships
14
CFPB:
Student Loan Servicing
Several initiatives in late 2013/early 2014 to address CFPB’s “significant concerns” with student loan servicing. Examples:
– Annual Report of Student Loan Ombudsman (October 2013)
Focus on payment allocation policies of private student lenders and loan servicers and sample letters to servicers and debt collectors
– Enforcement action against ITT Educational Services, Inc. for predatory lending tactics (Feb. 2014)
– Mid-year report on student loan complaints (April 2014)
2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loans between Oct. 1, 2013 and March 31, 2014
“Surprise” defaults
Revisions to education loan examination procedures (December 2013)
– Guidance on examination of student loan servicers who are already subject to CFPB supervision or servicers who are now subject to CFPB supervision as “larger participants” effective March 1, 2014
– CFPB likely to begin immediately examining entities that qualify as larger participants
15
NCUA:
Fair Lending Supervisory Guidance
Renewed focus on fair lending by NCUA
Fair Lending guidance issued last spring, beginning with
NCUA Letter to Federal Credit Unions (13-FCU-02)
dated March 2013
– Fair Lending Examination Program (March 2013)
– Fair Lending Guide (March 2013)
– Fair Lending Compliance Best Practices overview (April 2013)
– Fair Lending Compliance FAQ (May 2013)
NCUA is in the process of implementing guidance
16
NCUA:
Fair Lending Supervisory Guidance
Fair Lending Guide
– Useful in developing/evaluating fair lending compliance program
– Guide includes:
Overview of fair lending laws and regulations
Credit union operational requirements
Issues to consider when developing a fair lending compliance program
Checklists for testing compliance with laws and regulations or developing a fair lending policy
Fair Lending Best Practices
– Develop written fair lending policies and procedures
– Identify risks by conducting periodic fair lending risk assessments
– Develop fair lending program based on results of risk assessment
– Stay current on fair lending developments
Fair Lending FAQ – Answers to commonly asked questions
17
NCUA:
Fair Lending Examinations
NCUA conducts fair lending exams separately from compliance
exams
Most federal credit unions are not selected for a fair lending
examination
Those federal credit unions that are selected for a fair lending exam
must demonstrate the potential for higher fair lending risk through:
– HMDA data outliers;
– Call report data (e.g., rapid loan growth);
– Fair lending violations;
– General compliance risks; or
– Other factors
Federal credit unions selected generally experienced fair lending
baseline exams during 2013
18
NCUA:
Fair Lending Examinations
NCUA conducted 24 fair lending exams during 2013; now conducting 2014 exams
– Goal is 25 exams and 50 off-site supervision contacts per year
– Limited resources to conduct more
Federal credit unions generally notified by NCUA’s Office of Consumer Protection (“OCP”) 45-60 days in advance of examination
– Letter includes an “items needed list,” loan officer questionnaire, and request for information about products/services offered
At conclusion of exam, federal credit union will receive a written exam report
If federal credit union disagrees with exam report, may request review by OCP Director
– Cannot appeal findings because not considered a material supervisory determination
19
NCUA:
Fair Lending Examinations
In recent years, no public enforcement actions and no
referrals to DOJ by NCUA
NCUA is attempting to shift exam focus to look at fewer
focal points in future to allow more time for “deeper dive”
into discrete issues and comparative file analyses
– May result in more exam findings, enforcement actions and/or
referrals to DOJ
20
NCUA:
Off-Site Supervision Contacts
Alternative to fair lending examination is risk-based off-site supervision contacts (“OSC”)
– New in 2013; also risk-based in approach
Conducted off-site by NCUA analysts using CMS Program elements without transactional testing
NCUA budgets 24 hours/3 days to complete an OSC
Credit union receives “items needed list” in advance
NCUA reviews HMDA LAR accuracy, policies and procedures, compliance assessments, resources, and budget for fair lending risk management
OSC results in written and oral reports containing recommendations
21
NCUA:
CMS Program Expectations
NCUA generally uses same CMS Program elements as CFPB
NCUA fair lending program expectations:
– Dedicated fair lending officer for large credit unions
– Fair lending policy (either stand-alone or integrated with lending policies)
that addresses ECOA and Fair Housing Act requirements
– Regular fair lending training for employees, officers and board
– Periodic fair lending risk assessments
– Fair lending monitoring efforts, including, for example:
Fair lending statistical analyses expected for large credit unions
Second level review process for denied applications (preferably monthly)
Monitoring of underwriting and pricing exception reports (preferably monthly)
Compliance audits conducted independently from business (preferably quarterly)
– Board/management engagement in fair lending compliance oversight
22
Consumer Complaints
Increased regulatory focus on consumer complaint management
– FHFA OIG Audit Report AUD-2013-007 (Mar. 21, 2013)
– CFPB examinations
– New CFPB RESPA Rules
Expectations for consumer complaint management programs
– Written policies and procedures should
Define “complaint”
Capture complaints and inquiries at the first point of contact
Complaints are addressed and resolved promptly
– Appropriate escalation of complaints involving potential consumer harm from
discrimination or unfair treatment, or other regulatory compliance issues
– Complaint data “rolled up” for reporting purposes and analyzed for trends; should
drive adjustments to business practices
– Vendor complaints must also be captured
23
Vendor Management
Oversee vendors in a “manner that ensures compliance with Federal consumer
financial law, which is designed to protect the interests of consumers and avoid
consumer harm”
– Primary regulatory concern is vendors with customer contact
– First three CFPB enforcement actions involved failure to adequately oversee vendor
performance
– Recent Federal Reserve Board and OCC guidance on assessing and managing risks related
to third-party vendors, including:
Adopting risk management processes for each vendor
Comprehensive oversight/risk management for vendors engaged in “critical activities”
Effective risk management throughout product life cycle
Regulatory expectations for vendor management programs
– Risk assessment
– Initial due diligence
– Contracts
– Ongoing oversight
24 24
10 Lessons Learned in
the Examination Process
25
No. 1: Large Credit Unions Will be
Held to Big Bank Standards
Credit unions with $10B or more in assets, or approaching that size, will be held to big bank fair lending standards in CFPB examination process
– But Bureau will provide “grace period” to grow into bank model
Expectations by Bureau include:
– Dedicated fair lending officer
– Annual fair lending risk assessment
– Routine fair lending statistical analyses
– Evidence of board/management engagement in fair lending risk management (e.g., reports, minutes)
Review CFPB examination procedures to understand expectations and process
26
No. 2: Organization is Critical
CFPB informational, document and data requests are
typically voluminous and business-line specific
– NCUA requests less so
Maintain control over documents that will be disclosed to
regulators
– Responses to the CFPB or NCUA should be centrally managed
by legal, compliance or regulatory relationship manager (“RRM”)
Ensure that all responses are internally consistent and
also consistent with existing policies, procedures, and
practices (insofar as those are up to date)
27
No. 3: Responses to First-Day/Items
Needed Letter and Other Requests
Manage CFPB and NCUA expectations regarding
information and data requests before and during the
examination
Ensure that responses to first-day letter/items needed
requests and all subsequent requests (either oral or
written) made by regulators are as complete and
accurate as possible
Expect that Bureau may use information against the
credit union to determine whether a fair lending violation
has occurred
Make best efforts to be responsive and timely
28
No. 4: Attorney-Client Privileged or
Confidential Information
The attorney-client privilege still applies in an examination context
The CFPB should not ask credit union to turn over all attorney-client privileged materials in connection with examination
– CFPB rule (12 C.F.R. § 1070.48) indicates that submission of attorney-client privileged materials does not waive privilege
– But CFPB Bulletin 12-01 (Jan. 4, 2012) states that Bureau will reserve such requests for situations where the information is material to the exam and cannot be practicably obtained from non-privileged sources
Consult with legal counsel for advice before providing any privileged documents to CFPB
29
No. 5: Formal Presentations and
Written Explanations
Be prepared for the CFPB or NCUA examination team to
request formal presentations on certain subjects
– May arise in connection with particular compliance risk issues or
issues that are not easily explained through responses to the
first-day letter
Also expect to provide background on why certain
policies or practices are legal, appropriate, fair or
consistent with standard industry practices (e.g.,
UDAP/UDAAP concerns)
30
No. 6: Responding to Examiner
Inquiries
During or at the end of an examination, examiners may
ask questions that may seem innocuous
Take each question very seriously and answer them fully
and accurately
For CFPB, expect that answer may be shared with a
broader audience within the Bureau − and possibly in an
enforcement context
31
No. 7: Notification of Potential Fair
Lending Violations
If a fair lending violation is suspected by the CFPB
examination team, credit union may receive a Potential
Action and Request for Response (“PARR”) letter
If response to the PARR letter is unpersuasive, credit
union will be referred to CFPB’s Enforcement Division
Depending on the nature and severity of the alleged
violation, involvement by Enforcement Division tends to
mean that an enforcement action or DOJ referral is
imminent
32
No. 8: Coordination in Supervision &
Enforcement Matters
Remember that the DOJ, HUD and other agencies have
MOUs to share information and cooperate in supervision
and enforcement matters
– Coordination occurs behind the scenes
Do not assume that, because another agency has not
yet surfaced, it is not aware of what is happening in your
exam
33
No. 9: Prior Exam, Audit, and
Compliance Findings
CFPB and NCUA examiners will review relevant exam,
audit or compliance findings during the relevant review
period
Review prior findings to ensure that no repeat exam
violations occur
34
No. 10: Customer Remediation
Be proactive in identifying and addressing any fair
lending violations
Determine and provide customer monetary restitution
using a reasonable method before CFPB asks credit
union to do so
– Regulators tend to use “mean” or “average” method to determine
restitution, but other methods are an option if legally and logically
supportable
Note: Consumer releases are not permitted by the
Bureau
35
Questions?
Lori J. Sommerfield
Counsel
(202) 349-8093
lsommerfield@buckleysandler.com
Jeremiah S. Buckley
Partner
(202) 349-8010
jbuckley@buckleysandler.com
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