CFPB makes compliance a complex challenge

Banks will have to walk a fine line between sound lending and potential discrimination in the age of the Consumer Financial Protection Bureau.

Banks will have to walk a fine line between sound lending and potential discrimination in the age of the Consumer Financial Protection Bureau.  In a blog post from Dec. 14, the CFPB said it will make the fight against credit discrimination its top priority along with ensuring that financial products are fair, transparent and competitive.

The argument for creating the CFPB was that the bank regulators role as supervisors was too much on the side of the banks. The idea was that the Comptroller of the Currency, the FDIC and the Fed were not looking out for consumers and the country needed a separate bureau to look out for abuses against the average American. In addition, the CFPB was given authority by the Dodd Frank Act to enforce credit-related anti-discrimination laws. These laws prohibit banks from making financial services decisions based on potential clients’ race, color, religion, national origin, sex, marital status, age, or receipt of public assistance.

Banks will now find themselves dealing with multiple regulators with different purposes. The OCC on the one hand will regulate for sound lending, whereas the CFPB will regulate for discrimination and abusive lending. The absence of age information in underwriting is a good example of a possible conflict between the two regulators. A bank cannot ask the age of a person on a credit application. What if an 80-year-old individual applies for a 30-year mortgage? The anti-discrimination laws in place prevent bankers from making a lending decision based on a person’s age alone. However, safety and soundness regulators would scoff at a loan written to someone who is not likely to live to the term of the contract.

Now a defender of the anti-discrimination regulation might argue that a safety and soundness regulator wouldn’t know the age of the borrower when reviewing the bank’s loan, and so wouldn’t see any credit risk. This is true, but it only means that the regulator cannot see the loan was risky; it does not mean that a dangerous loan does not exist.

Another area of possible conflict lies between the focus on discrimination and efforts to prevent abusive lending. The term “abusive” is the new buzz-word today and no formal definition has been given for it. However, the term does bring certain questionable practices to mind.  A banker’s practice may be abusive when he sells a financial product to a client who does not need it or understand it. So, what if our 80-year-old from the previous example applies for a 30-year mortgage? If the banker advises the individual that renting may be a better option based on the person’s age, the banker’s conduct is discriminatory. On the other hand, if he does approve a mortgage for the individual, he may be accused of abusive lending, since a 30-year mortgage is usually inappropriate for an 80-year-old.

Fredrikson & Byron Law