Federal banking regulators are hitting their stride

Expect major changes in the coming months

Chopra has published an examination manual that makes it easier to sue lenders without evidence of intent."

President Biden’s appointees, including those in acting capacities, are about to roll out a number of new regulations and put into effect already announced policies that will change the nature of banking compliance. These regulators are putting in place policies that reflect the progressive left’s policies in the financial arena.

With the departure of Republican appointee Yelena McWilliams, the five member FDIC board now consists of three Democrats: CFPB Director Rohit Chopra, acting Comptroller Hsu and Martin Gruenberg, the former and now acting chairman. Most observers believe that Chopra, a disciple of Elizabeth Warren, is the driving force in compliance matters for all of the agencies involved in financial services regulation.

Chopra has published an examination manual that makes it easier to sue lenders without evidence of intent. They will be using the statistical tool known as disparate impact in which an institution can be charged with fair lending violations if a particular group in an assessment area does not receive the amount of credit that matches their share of the population. The old disparate impact rules date back to 1995 and were used extensively in the Obama administration when many banks had to defend lending practices before the Department of Justice. Two subsequent U.S. Supreme Court cases limited the use of disparate impact and the Trump CFPB stopped using it. Chopra has revived the standard without acknowledging the limitations.

The CFPB has expanded the use of disparate impact in its examination manual to include bank products and services beyond credit. They are looking for discrimination in all consumer markets including “servicing, collections, consumer reporting, payments remittances and deposits.” Their claim is that many bank products are “unfair” based on its “unfair, deceptive, and abusive acts or practices” (UDAAP) authority. This amounts to extending fair lending laws beyond the laws passed by Congress. Their lack of legal authority will not prevent them from using disparate impact on products such as overdraft fees or minimum deposit requirements.

Section 1071 of the Dodd-Frank Act (DFA) of 2010 requires the CFPB to create a HMDA-like regime for reporting on small business loans with an emphasis on loans to women and minority-owned businesses. The 1071 mandate lied dormant for a decade until a California consumer group sued the CFPB in federal court to have it implemented. The CFPB has since proposed a 925 page regulation based on four pages of law. It is expected to be imposed in March of 2023.

Any bank that annually makes more than 25 business or agricultural loans to any entity with $5 million or less in annual revenue is required to collect 21 data points for every loan application and approval. That data must be aggregated and reported to compliance examiners every year. Much of that information will also be made public. The sheer impossibility for creating a system for analyzing hundreds of types of loans for potential discrimination is evident. This is not the relatively simple reporting system that is currently used for mortgages. TBA submitted extensive comments on the proposal noting how the regulatory and potential liability burdens will weigh most heavily on community banks.

The CFPB will also propose regulations in a few months on Section 1033 of DFA. Banks and other financial services providers will have to make available to consumers all of their personal account information. Potential problem areas involve the proprietary use of information and how consumers can relay the data to third parties such as fintechs. 

The agencies are also proposing a major overhaul of the Community Reinvestment Act. The Trump OCC regulation was withdrawn. This new CRA revamp maintains the status quo for banks under $600 million in assets, has some new requirements for banks between $600 million and $2 billion and has new testing and reporting requirements for banks over $2 billion. Section 1071 reporting is incorporated into the new CRA regulations.

Texas banks should anticipate that there will be a new and more strenuous analysis in all upcoming compliance examinations for fair lending. Whether it is the FDIC, the OCC, the Federal Reserve or the CFPB, there will be an emphasis on the use of disparate impact and, most likely, an expansion of each bank’s assessment area in fair lending reviews. 

Especially for the interests of Texas community banks, the industry needs to push back on all of this regulatory overreach. A change in control of Congress may help rein in these agencies. Litigation is also an option for regulators acting outside of the requirements of federal law.