Edition # 24: The New Normal?

February 25, 2021|Ability to Repay/QM, CFPB, Fair Lending, Mortgage Industry, Regulation by Enforcement

We’re all sick of hearing about the “new normal”, but only one word there causes all the consternation…, normal. New or not, nothing feels normal when you are wearing a mask everywhere. What happened in Texas; definitely not normal. Even Tom Brady winning the Super Bowl didn’t feel the least bit normal with him wearing a Buccaneer jersey. And now, Rob Chrisman[1]has a daily podcast and is threatening to appear in Twitter of all places! Except, is that the real Rob Chrisman?[2]No, the world has been turned upside down and normal has nothing to do with it.

The Old Normal?

Meanwhile, I was recently quoted by Kate Berry in the American Banker[3]about how fair lending enforcement, especially disparate impact claims are likely to increase under the CFPB’s new Interim Director, Dave Uejio. Berry accurately quoted me saying, “Fair lending, fair housing are actual problems, but 50 years of fair-lending enforcement has not moved the needle in terms of the racial gap in housing. We need some new ideas.”[4]Disparate impact, however, is not a new idea.

As Berry reports, Uejio and the CFPB “will consider using the disparate impact legal standard to punish lenders for discriminatory effects that result even from neutral policies.” Yet, in Mr. Uejio’s blog he appears to go a step or two further,

“The country is in the middle of a long overdue conversation about race, and as we all know, practices and policies of the financial services industry have both caused and exacerbated racial inequality. I am going to elevate and expand existing investigations and exams and add new ones to ensure we have a healthy docket to address racial equity…, we will also look more broadly, beyond fair lending, to identify and root out unlawful conduct that disproportionately impacts communities of color and other vulnerable populations.” [emphasis added]

Perhaps Mr. Uejio is only being responsive to President Biden’s Executive Order to HUD regarding taking actions to address racial equity in housing, but CFPB is an independent agency and is not subject to Executive Orders (although the Supreme Court clarified that the President can fire the CFPB director). But, is Mr. Uejio really interested in a conversation about race issues, or has he already made up his mind?[5].

Back to the Cordray Era?

I’ve written previously in this blog[6]and elsewhere about the dangers of regulation by enforcement and how the CFPB’s Director’s powers can be misused. So, revisiting the misguided approach of the CFPB under former Director Richard Cordray definitely wasn’t what I had in mind when I said, "new ideas were needed"[7]. What troubles me most in Mr. Uejio’s comments, however, is that Uejio casts the entire financial services industry as bad actors, asserting (“as we all know”) that the financial service industry is systemically racist. Uejio says he wants to expand enforcement beyond fair lending to root out racism. That all sounds very Cordray-like with a “guilty until proven innocent” burden of proof, along with the desire to both expand enforcement beyond the law and to change interpretation of the law through enforcement. What this means for housing lenders specifically remains to be seen, but Mayer Brown’s Ori Lev (a former CFPB enforcement official) offered his insights on Uejio’s first enforcement lawsuit.

Will stronger enforcement and regulation lead to racial equity?

We’ve had over 50 years of fair lending and consumer protection enforcement to get to the current 30% racial gap in homeownership for Black people. That gap is precisely where we were when the Fair Housing Act was enacted and when the FHA shamefully engaged in redlining of zip codes in the 1940’s through the 60’s. Further, the data shows that the percentage of Black homeownership even declined after the Dodd Frank laws were passed[8]. Both the Clinton and the Obama Justice Departments advanced disparate impact-based enforcement claims against mortgage lenders, but the racial gap in housing continues. The False Claims Act cases of the Obama administration (especially focusing on income discrepancies) caused a reaction by many large lenders to simply exit the FHA market which, no doubt, further disproportionally impacted minority homeownership opportunity. So, will even stronger fair lending enforcement now by the CFPB lead to better racial equity in housing in 2021 and beyond?[9]

The government's role in fostering equity

One of the valid complaints about the initial PPP loan program last year was that the funds mostly went to big business and small businesses were left out in the cold. Banks were encouraged to get as much money into the economy as possible quickly[10], thus existing bank customers and larger loans were prioritized. Since small businesses are disproportionally more minority owned than big businesses, the initial PPP Program was a case study in disparate impact directly caused by the government’s own programs.

Wisely, recognizing this issue with the PPP loan program, the Biden administration recently announced a series of reforms aimed at refining the targeting of the federal funding to favor small businesses. This is basically the government acknowledging that the lenders didn’t discriminate illegally in creating the PPP loan program's disparate impact, but rather, the program itself led to disparate outcomes. Change the program/don't punish the banks. This move is to be applauded.

Similarly, the CFPB and/or the Biden administration should examine how CARES Act protections for homeowners in forbearance contributes to racial inequity. Existing homeowners have been subsidized by the CARES Act and other government programs through forbearance and foreclosure moratoriums (recently extended for up to 18 months), but renters have had no such grace. In fact, the use of forbearance has been mandated not to negatively impact homeowner credit[11]. Yet, renters (who are disproportionately minority) will be disproportionally unable to join the ranks of homeowners due to negative impact to their credit for failure to pay rent (among other things). So, forbearance is another government program that will disproportionally limit housing opportunity for minorities exacerbating inequity. Finally, for the vast majority of borrowers, mortgage lenders in the US don't make up their own underwriting guidelines. Those guidelines are established by the US government's GSE wards.

Again, there is no question that we need to do something about racial equity in US housing opportunity and that inequitable outcomes from systemic racism need to be identified and fixed. But, while it might make some people feel good to punish lenders for discriminatory lending patterns, the racial gap proves that fair housing enforcement policy over the last 50 years has failed to produce progress towards equitable housing outcomes, particularly for Black Americans. Unfortunately, like the looting during last summer’s otherwise peaceful protests, enforcement seems to only offer a display of anger at the inequities without fostering any real progress towards the goal of social justice.

[1] Over 50% of you found this blog through Rob's daily.

[2] If you listen and read closely, you will see that Robbie Chrisman appears to have usurped the Rob Chrisman handle from his father. That reminds me of the “Dread Pirate Roberts” story from Princess Bride: the "Dread Daily Mortgage Blogger Rob" perhaps?

[3]Actually, I was initially misquoted, but it was promptly corrected in the online version.

[4] Check out my friend’s podcast and blog, Jeremy Potter’s Sunday Cup of Tea, f/k/a Saturday Cup of Joe from Detroit for more information about the racial housing gap and insights about housing, technology and answering well (and a weekly homage to Detroit).

[5]Spittin’ in the wind is half the fun of this blog.

[6]See e.g., Edition #13: CFPB's fair lending case "pushes the envelope" (mortgagemusings.com)or Ed.#15: RESPA; Don't Argue with Success (mortgagemusings.com)

[7] To be clear, this isn’t a post about the whether disparate impact is available under ECOA. Also, more recently, see https://www.americanbar.org/groups/business_law/publications/blt/2018/06/cfpb/, by newlywed financial services attorney, Catherine Brennan. Congrats Catherine!

[8] Having a regulation requiring documented income (QM/ATR) limits borrowing opportunities for many lower income people and thus disproportionally impacts minorities. For example, a domestic worker’s or day laborer’s wages may be paid in ways that don’t always make it into documentation such as tax returns or bank accounts.

[9][9]See definition of madness (FYI, not from Einstein).

[10] Economists can debate whether it was better for minorities to address the COVID-caused economic recession impact by boosting the overall economy and job market than supporting small businesses. Either way, COVID itself had a disparate impact on minorities, both medically and economically, so, at a minimum, equity demands that government programs not make those disparities worse.

[11] CARES Act credit reporting compliance by servicers is another CFPB priority discussed in Mr. Uejio’s blog.