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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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10 Lessons Learned in

the Examination Process

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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

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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)

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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

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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

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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)

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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

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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

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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

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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

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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

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Questions?

Lori J. Sommerfield

Counsel

(202) 349-8093

lsommerfield@buckleysandler.com

Jeremiah S. Buckley

Partner

(202) 349-8010

jbuckley@buckleysandler.com