John Heasley

John Heasley
TBA General Counsel

Biden bank regulators are about to get busy on fair lending

[TBA] will need help from our bankers in describing how difficult and troublesome setting up this new fair lending regime will be.

Texas bankers remember the focus put on fair lending examinations during the Obama era. More than a few banks were accused of discriminatory lending and had cases referred to the Department of Justice where they often languished for months. During the pendency of these cases, bankers worried about reputational risk and were limited in activities such as establishing branches. These accusations were especially troubling when they involved “disparate impact” on a certain group of customers. Disparate impact does not require any intentional practices, only a showing that group X received fewer loans than the percentage of the group X population in the bank’s market.

The Obama regulators proposed a disparate impact rule in 2013. A 2015 Supreme Court case allowed for disparate impact claims to be made under the Fair Housing Act but also limited its application by holding that a disparate impact claim cannot be “based solely on a showing of statistical disparity.” The Trump administration made significant changes to the rule that were scheduled to take effect in October 2020, but activist groups sued and a Massachusetts federal judge issued a nationwide stay of the rule. The new Biden DOJ has stopped defending the case and has reissued the 2013 rule. (The comment deadline is August 24, 2021.)  We anticipate more vigorous fair lending exams later this year.

After 11 years, the Consumer Financial Protection Bureau will finally issue a rule for comment by Sept. 30 on a new regulatory regime for small business lenders, Section 1071 of the Dodd-Frank Act. Neither Richard Cordray nor Kathy Kraninger, former directors of the CFPB, issued 1071 regulations. California consumer activists sued last year so the CFPB agreed to publish a rule. It will require the collection of loan application data from women-owned, minority-owned and small businesses, including the gender, race and ethnicity of the owners of these businesses. The stated goal is to provide the CFPB the tools necessary to conduct examinations focused on potential gender and race-based lending discrimination.

The CFPB released an outline of proposals on Sept. 15, 2020.  The proposals covered term loans, lines of credit and business cards, and mentioned the need to collect 15 data points for each application. Like many other aspects of the Dodd-Frank Act, the compliance costs will fall heavier on community banks. (The QM and TRID regulations for mortgage lending were over 1,800 pages and the largest lenders had substantially lower compliance costs.)

Beyond the costs of compliance, how will they set up a system to compare apples to apples to see if small business borrowers are being treated fairly? Years of HMDA compliance have given us a reliable and fairly predictable way to look at mortgage lending, but how do you set up comparisons for the dozens of types of small business loans?

TBA will be preparing comments for the new 1071 regulations, but we will need help from our bankers in describing how difficult and troublesome setting up this new fair lending regime will be. One can envision a resulting proposal that will hurt the very borrowers they believe they are trying to help.