Coronavirus Stimulus Loans Face Fair Lending Scrutiny From CFPB

The Consumer Financial Protection Bureau is scouring banks’ books for potential fair lending violations related to coronavirus emergency loans, but there are concerns that the bureau may not act on its findings.

Top CFPB officials July 16 said they will be reviewing banks’ Paycheck Protection Program lending patterns under the Equal Credit Opportunity Act, a 1974 law that bars discrimination based on gender, race, and ethnicity, among other factors.

Consumer advocates applauded the CFPB’s fair lending reviews, particularly with growing evidence that women, Black, Latino, and other borrowers haven’t had equal access to federal stimulus funds. But there is also a great deal of skepticism, given the lack of fair lending enforcement under the Trump administration.

“If they are supervising for ECOA violations, what are they doing?” asked Diane Thompson, a former deputy assistant director for regulations at the CFPB. “Because even a casual reader of the news can see that there are some pretty stark disparities,” she said.

Virus Response

The CFPB has shifted its supervisory work in response to the coronavirus pandemic and federal stimulus programs like the PPP, which provides federal loans to help small businesses meet payroll and other expenses.

That effort includes examining banks and other PPP lenders for compliance with ECOA, Bryan Schneider, the head of the bureau’s Supervision Enforcement and Fair Lending division, said during a July 16 CFPB webinar.

“The bureau is requesting information related to the PPP to address potential fair lending risk, he said.

The Small Business Administration and the Treasury Department, which administer the PPP, haven’t collected relevant fair lending data to date, making the reviews more difficult, Schneider said.

Another challenge is the type of lending under the PPP. The CFPB has in the past focused only on the consumer side of ECOA enforcement and not touched the law’s small-business lending provisions.

“It is extremely important for the bureau to actually use those powers to make sure that people are getting access to the credit they deserve,” said Center for Responsible Lending Executive Vice President Nikitra Bailey.

Targeted Exams

In addition to small business stimulus loans, the CARES Act included provisions for mortgage and student loan forbearance, credit reporting relief, and other areas that fall under the CFPB’s jurisdiction and have drawn attention from its examiners.

The CFPB has shifted from full-scope exams to targeted exams at many of the banks, payday lenders, credit reporting bureaus, and other companies it oversees. Around half of the bureau’s scheduled examinations in the third quarter were rescheduled to focus on the targeted reviews, Schneider said.

The CFPB’s prioritized reviews allow examiners to take a more “real time” look at coronavirus-era lending and compliance with CARES Act provisions, Schneider said. The bureau is focusing on mortgage, auto, and student loan servicing; debt collection; and credit reporting, looking at several months’ worth of data.

“They have a risk-based approach to supervision, and when you look at where the risks are for consumers right now, it is not surprising the CFPB would focus on particularly the CARES Act,” said Rachel Rodman, a former top CFPB attorney.

The CFPB doesn’t have direct CARES Act oversight responsibility, but it can use its broad Dodd-Frank Act powers against unfair deceptive and abusive acts and practices (UDAAP) to police it, said Rodman, now a partner at Cadwalader, Wickersham & Taft LLP.

The CFPB also can review banks’ PPP lending under the UDAAP standard, along with ECOA and other laws.

The CFPB ‘s announcement that it’s looking for fair lending violations in PPP disbursements sends a strong signal, Rodman said.

Any review will “include questions about what you’ve done around fair lending compliance in delivering those loans,” she said.

Evidence of Discrimination

Consumer and community activists say the CFPB will have work on its hands if it chooses to be aggressive on PPP lending.

The CFPB’s website lists only two fair lending enforcement actions since Kathleen Kraninger took over as director in December 2018, and zero ECOA enforcement actions.

The CFPB filed 14 fair lending enforcement actions during former Director Richard Cordray’s tenure from the CFPB’s early days in July 2011 through late November 2017, although only two specifically brought ECOA claims.

A May study from the Center for Responsible Lending found that fewer than 79% of Black-owned businesses applied for PPP loans, while 91% of all businesses applied. Only 40% of Black-owned businesses were approved for PPP loans, compared to an overall 52% approval rate, the study found.

Using a match-paired testing technique where White and Black borrowers discussed the same loan at the same Washington-area bank, the National Community Reinvestment Coalition and a team of academics found that Black applicants received discriminatory treatment 43% of the time.

The CFPB is playing catch up on data collection. The 2010 Dodd-Frank law required financial institutions to compile and report information about small-businesses loan applications, including those from women and minorities. But the CFPB never issued rules during the Obama or Trump administrations.

The CFPB agreed to propose a small-business data collection regulation as part of a settlement with the California Reinvestment Coalition earlier this year. But it’s unclear how the pandemic has impacted the rulemaking process.

The rule would have allowed the CFPB, SBA, and Treasury “to collect important demographic information which would have helped allocate resources to minority businesses to better ensure their ability to successfully ride out this recession,” the National Community Reinvestment Coalition said in its report.