introduced by Senators Jack Reed (D-RI) and Bill Hagerty (R-TN) and Representatives John Rose (R-TN) and Ritchie Torres (D-NY). If enacted, this pro-consumer legislation would curb the abusive use of mortgage credit “trigger leads” to all but a very limited set of circumstances. Trigger leads happen when consumers apply for a mortgage, and the lender puts in an inquiry to a credit reporting agency to pull their credit. Under the Fair Credit Reporting Act, credit reporting acts are currently allowed to resell consumer information to prospective creditors, if they are ready to make consumers a “firm order of credit.” As a result, though, many consumers have been inundated with hundreds of phone calls, texts, and mails, just moments after they applied for a mortgage: adding confusion and stress during an already very stressful time. This law would stop this practice, allowing credit reporting agencies to pass on consumer information only in a very limited set of circumstances, in cases where potential lenders already have a firm relationship with the consumer (for instance, as their current bank or credit union where they hold deposits).

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Dear Chairman Barr and Ranking Member Foster:

As consumer protection and civil rights organizations, we write to express our concerns with two legislative proposals being discussed at today’s hearing, namely H.R. 6789, the Rectifying UDAAP Act and a still unintroduced bill to amend the Truth in Lending Act to allow covered entities to offer small-dollar credit products and for other purposes.  These proposals are deeply misguided, and our organizations urge Committee Members to oppose and prevent their advancement.

H.R. 6789, the “Rectifying UDAAP Act”

 This bill would narrow the scope of UDAAP under the Consumer Financial Protection Act and hinder the ability of the CFPB to determine when an activity is an unfair, deceptive and abusive practice. It would hamper the CFPB’s ability to identify UDAAPs and significantly raise the threshold for abusiveness. The bill accomplishes the long-standing goal of preventing the CFPB from defining discriminatory practices as UDAAPs, even though discrimination is inherently unfair and harmful.

It would slow down the CFPB’s efforts to implement enforcement actions. For example, because it permits entities that self-report violations to have special notification rights, it extends delays between the identification of a UDAAP and an enforcement action to prevent it. It would also introduce new hurdles to providing monetary relief.

By requiring the CFPB to conduct unnecessary rulemaking to establish policies and procedures for issuing penalties, it could leave consumers at risk of being harmed by UDAAPs. It is also concerning that the bill would require the rulemaking to include a cost-benefit analysis, as such a step could lead to the result where the profits derived by an unfair or discriminatory practice are weighted as a benefit.

We strongly oppose this bill.

 H.R. ___, a bill to amend the Truth in Lending Act to allow covered entities to offer small-dollar credit products and for other purposes.

In the guise of adopting safeguards for small-dollar credit, this bill would exempt any bank or other creditor that offers specified small-dollar loans from any civil penalties or damages for violation and law in the entire Title 15 of the United States Code in connection with the small-dollar product. That title covers 122 chapters, including the entire Chapter 41, which includes the Truth in Lending Act, the Restrictions on Garnishment of Social Security and other federal benefits, the Credit Repair Organizations Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, and the Electronic Fund Transfer Act, as well as the antitrust provisions of Chapter 1 and many other laws. Lenders would be able to violate these laws with impunity.

We strongly oppose this bill.

Americans for Financial Reform

Center for Responsible Lending

Consumer Federation of America

National Consumer Law Center (on behalf of its low-income clients)

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“The CFPB’s new rule prioritizes the needs of cash-strapped households ahead of big bank profiteering,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “In 2022, credit card companies charged $14.5 billion in late fees. By prohibiting issuers from charging  a $31 missed payment fee when the true cost to credit card companies is less than eight dollars, the rule closes the loophole that permitted this form of price-gouging and injects fairness where it has been sorely needed.”

Fact sheet:

The rule will save consumers money. The CFPB estimates the rule will reduce the sum of late fees charged per year from $12 billion to $3 billion. These fees serve no purpose except to pad the profits of big banks.

The rule will not make banks stop offering credit cards: The industry contends that without late fee income, some credit card companies will issue fewer cards or exit the market entirely. This logic is unfounded. Credit card companies charged more than $105 billion in revenues in 2022 – and with increases in interest rates and outstanding balances since then, their revenues are likely to be higher regardless of how much they can charge for a missed payment.

Applying strong consumer protections to credit cards does not undermine credit availability. Research on the impacts of the CARD Act revealed an interesting pattern. Consumers benefited from the lowered cost of credit, avoided billions in late fees, and still opened more than 100 million new credit card accounts in 2014. Total available credit increased 10 percent from 2012 to 2015.

Curbing late fees will not force banks to lose money. It will just prevent them from making exorbitant profits from a junk fee. The rule still allows them to recover their costs. But it corrects a loophole that has favored credit card companies at the expense of consumers. Over the years, late fee income has been three to five times greater than collection costs on accounts that are  past-due but have not yet been written off. Federal Reserve research shows that collection costs, the main expense of late payments, hover around 25 percent of late fee income.

Consumers like the proposed rule. Fifty-three percent of survey respondents said they “strongly support” lowering the maximum late fee, and another 29 percent “somewhat support” it. Only 7 percent strongly oppose it.

The CFPB created the rule using evidence-based research. The CFPB analyzed financial data from six large credit card banks to determine the real cost of late payments. The choice of an $8 immunity provision is derived from this research. The CFPB rule allows any bank that can demonstrate that its costs were higher to receive an upwardly adjusted cap consistent with these proven costs.

The rule will not cause credit card issuers to curtail rewards programs. The credit card market is better understood as several segments within a single product space. Rewards cards are generally offered to consumers with prime credit or better, whereas below prime consumers rarely receive the same benefits. In its most recent survey of the credit card market, the CFPB found that prime plus and above accounts redeemed approximately 80 percent of all rewards, whereas below-prime cardholders redeemed only about six percent of rewards. Subprime accounts were more likely to carry revolving debt, pay only the minimum balance, and miss a payment. Interestingly, because deep subprime consumers carried higher levels or revolving credit and paid higher interest on those debts, they had higher average minimum payment due amounts. In the same study of 2022 accounts, deep subprime accounts incurred 15 times as many late fees per year than did prime accounts. Accounts that paid off their balances each month – and thus did not incur late fees – redeemed a high share of rewards. There is little evidence to support the theory that lower revenue on credit card late fees will force banks to curtail rewards.

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“Lead generation fees paid by banks to these websites are invisible hands that guide consumers into higher-priced credit cards,” said Adam Rust, Director of Financial Services at the Consumer Federation of America. “But consumers should be concerned that those hands will end up in their wallets, because banks cover the cost of advertising on digital shopping sites by charging higher interest rates. By casting a spotlight on the practices of digital comparison-shopping platforms, the CFPB’s circular is an appropriate remedy to a market where so many top 10 lists found on these card comparison sites point consumers to a big bank credit card, even though credit cards issued by smaller banks and credit unions tend to have lower interest rates.”

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“This timely report provides clear evidence to show how credit card companies aren’t just covering their costs – they are applying an additional ‘greedflation charge,’” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “Increasingly, credit card companies play by different economic rules, especially the big credit card issuing banks. This report is another piece of evidence highlighting the effects from a lack of competition. Even though more than three thousand banks issue credit cards, ten banks have more than four–fifths of all accounts – and they charge higher interest rates. It underscores how large marketing budgets permit a few banks to hide higher rates and penalty fees behind rewards promotions. The result is a market that is out of balance. 

Today’s report further justifies the CFPB’s work to curb junk fees and promote transparent pricing. In no uncertain terms, it explains why they must level the playing field between consumers and banks and presents one more reason for prudential regulators to increase their scrutiny of merger applications.” 

The post CFA Statement in Response to CFPB Credit Card Interest Rate Report appeared first on Consumer Federation of America.

Sharon Cornelissen, CFA’s Director of Housing, reacts:

“It is disappointing to see the banking trade associations try to undermine the modernized CRA rule, which was the result of years of interagency collaboration, thousands of public comments and industry input, and a careful consideration of how banking and the challenges of underserved markets look different today than when CRA was passed in 1977.”

The Community Reinvestment Act remains an essential tool to make sure that people in lower-income and historically underserved communities across the United States have access to lending, ranging from a loan to start a small business to a mortgage to buy a home.

Adam Rust, CFA’s Director of Financial Services, reacts:

The CRA was done in an incredibly deliberate manner. It took a decade to get the regulators to consider changes. Critics have no reason to fault the process, as the regulators intentionally aimed to honor all of the expectations of the APA.

Moreover, the new rule is hardly one-sided. The small banks received significant concessions. Even though CRA was meant to address redlining, race is still not considered in exams.

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Earlier this month, the Supreme Court heard oral argument in connection with the cases Loper Bright Enterprises v. Raimondo and Relentless, Inc. v. Department of Commerce, which challenged the Chevron deference doctrine. Based on the nature of their inquiries and remarks, the Supreme Court’s six conservative justices indicated that they may very well upend Chevron deference. Such a ruling would hamper federal agencies from continuing to do their important work, give corporations the ability to effectively gridlock policymaking, and ultimately, eliminate important safeguards for American consumers. 

This blog provides some examples of how overturning Chevron deference could adversely impact each key issue area that the Consumer Federation of America focuses on. We aim to shed light on the potential challenges and setbacks in advocacy and policy enforcement and emphasize the critical role that Chevron deference plays in supporting the work of federal agencies.  These potential impacts underscore the importance of maintaining Chevron deference for the continued protection and promotion of consumer interests and well-being. 

Food Safety  

Food safety advocates understand all too well that consumers face a gauntlet of preventable harms in the food system not so much because federal regulators enact bad policies, but because they do not take any action at all. Cronobacter in infant formula, dangerous Salmonella in poultry, literally thousands of chemicals in food with unexamined safety records, alcoholic beverage labels that fail to disclose ingredients, allergens and other basic facts—all of these problems and more require new rulemaking, which regulated industry may challenge in court. Despite Chevron deference, the industry and its throngs of well-paid lawyers often prevail, and years of work can go down the drain. Decades of regulatory dysfunction may follow, as has happened in the wake of a federal court of appeals ruling that invalidated the Department of Agriculture’s rules on Salmonella in meat and poultry in 2001. Indeed, USDA’s failure to protect consumers from foodborne illness has become so dire that several large companies have joined consumer groups in support of reform. Many factors undoubtedly contribute to regulatory inertia—a conflicted mission at USDA, a culture of timidity at the U.S. Food and Drug Administration, the revolving door between industry and regulatory agencies in general, the list goes on. However, should the U.S. Supreme Court rule that regulatory agencies are even more susceptible to second-guessing from the courts, the tendency to use litigation risk as an excuse for inaction will grow, and consumers will pay the price.   – Thomas Gremillion

Investor Protection 

A potential U.S. Supreme Court decision in Loper Bright to unravel the Chevron doctrine poses a significant threat to the Securities and Exchange Commission’s (SEC’s) ability to protect investors from bad actors, promote market integrity and fairness, and ensure investors have the information they need to make informed decisions.  At a time when markets, technology, and financial risks are evolving rapidly—perhaps unprecedentedly so given the rise of artificial intelligence, the risks of climate change, and the growth of cryptocurrencies—it is imperative that the SEC keeps pace. Upending Chevron would fundamentally jeopardize the SEC’s ability to do so. 

Even now, the SEC’s investor protection efforts continually face the threat of litigation from industry opponents. If the Court tips the scales even further by limiting the SEC’s authority to interpret and apply the securities laws, then the prospects for strong, lasting investor protections would only get worse.  Policing our markets and protecting investors from misconduct demands a level of expertise and precision that only the SEC possesses, and that neither courts nor Congress can match. Limiting the SEC’s ability to exercise its authority would only serve to harm investors, diminish market integrity, and destabilize our financial system. – Micah Hauptman / Dylan Bruce

Housing 

The overruling on Chevron deference would have far-reaching consequences for the ways Americans are housed. Over the last forty years, this jurisprudence has supported the ability of federal agencies to effectively regulate American corporations and protect consumers. Within housing this includes the ability of agencies to implement federally- mandated rental protections and housing counseling, offer fair housing oversight, enforce federal emission and building standards, and protect homeowners against exploitative mortgage products. For example, in 2023, after years of collaboration between three federal banking agencies (the FDIC, Federal Reserve Board, and OCC) and several rounds of vigorous public input, new, modernized rules interpreting the 1977 Community Reinvestment Act were released: a deeply collaborative product that responds to the unique realities of banking and community development today.

The overruling of Chevron risks making these types of rulemakings all but impossible and allows the worst acting corporations and their trade groups to gridlock policymaking by tying decisions up in courts. By contrast, federal agencies are led by politically appointed leaders, are accountable to Congress, and staffed by policy experts who often bring decades of experience. It is essential that we allow federal agencies to continue to do their important work and make sure that American consumers live in safe and affordable homes, are protected against housing discrimination, and can rely on fair and transparent mortgage products. – Sharon Cornelissen

Product Safety  

The U.S. Supreme Court’s decisions in Loper Bright Enterprises v. Raimondo and Relentless v. Department of Commerce could undermine consumer safety and health.  The potential safety ramifications are enormous and could implicate vehicle safety standards, phthalates concentrations in children’s toys, drugs, medical devices, and so much more. The federal agencies tasked with ensuring public health and safety rely on their agencies’ vast technical and scientific expertise. Subject matter experts can include engineers, epidemiologists, chemists, and other complex fields. Neither Congress nor judges have access to the expansive technical expertise of federal agencies. Unlike the judicial system, federal agencies provide the public with the chance to comment on proposed regulation. As such, health and safety agencies can utilize critical information from product safety professionals and safety advocates. The foundational principle of Chevron enables agencies to keep consumers safe and healthy. – Courtney Griffin 

Consumer Protection 

The Chevron doctrine correctly defers to subject matter experts at agencies like the Federal Trade Commission who live and breathe consumer protection on a daily basis and who are accountable to the public through legislative oversight and extensive transparency requirements. If the Supreme Court strikes down Chevron, inexperienced and uninformed political appointee judges can freely question regulatory interpretations and create harmful case law that is difficult to overturn. Such a decision will inevitably erode longstanding, strong safeguards that keep Americans safe, healthy, and shielded from predatory and fraudulent practices. – Erin Witte  

Financial Services  

Without Chevron deference, the current practice of permitting regulators to interpret regulatory ambiguities in consumer financial protection law will make consumers vulnerable to discrimination and undermine innovation in the marketplace. 

In almost every facet of our economy, technology is disrupting business practices and permitting new risks to consumers. Since the 19th century, commercial banking has been understood to consist of lending money, taking deposits, and paying checks. A judge with experience in banking law should readily grasp the meanings of those activities and their implications for our economy. On the other hand, emerging technologies require policy professionals with a deep understanding of highly technical topics. Federal regulatory agencies employ these experts. Their wisdom benefits policymaking. 

Addressing discrimination in artificial intelligence is among the developments likely to require deep understanding as a precondition for successful regulatory implementation of existing banking laws. Even an attorney with a career of experience in fair lending law would be challenged to evaluate the fairness of an AI-driven algorithm, for example. The Equal Credit Opportunity Act (ECOA), the Fair Housing Act (FHA), the Fair Credit Reporting Act (FCRA) and the Federal Trade Commission Act (FTCA) are among the laws whose fairness standards can be applied to algorithmic decision-making in lending and lending-adjacent activities. 

 Inaction by the institution with authority for AI governance, be it a regulator or the Courts, will lead to problems for all affected stakeholders. Consumers will be vulnerable to discrimination and without regulatory clarity, lenders will be anxious to try AI out of fear of legal jeopardy. Markets need clarity on how fairness is defined and measured and even on how to identify protected class status when lenders are prohibited from soliciting demographic information directly. The Supreme Court must uphold the principle of Chevron deference. – Adam Rust   

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“We applaud the CFPB for taking this needed step to rein in junk NSF fees,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “When a bank consciously chooses not to honor a payment request, but still charges a fee, it prioritizes its greed above its customer’s needs and adds insult to injury. It is telling that most banks have stopped charging NSF fees, and revealing that some have not. The CFPB’s rule will force financial institutions that have been dragging their feet on doing away with these junk fees to finally stop their harmful practices.” 

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VER HOJA DE INFORMACIÓN

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The new rule closes a regulatory loophole that had permitted financial institutions to offer overdraft services but exempted them from prohibitions in the Truth in Lending Act (TILA). When the Federal Reserve implemented TILA in 1968, it decided to not include overdraft services within the definition of credit. At the time, the practice of covering occasional check overages was a discretionary service extended to customers through manual review. However, with the introduction of the debit card in the 1980s, banks automated the service and introduced them at scale. Overdraft fees morphed into a line of revenue of more than $10 billion annually.

“Banking is supposed to be about making loans, taking deposits, and facilitating payments, but at some point, some banks decided it was also about charging junk fees,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “The CFPB’S proposed rule restores balance in the relationship between consumers and their financial institutions.

The CFPB’s proposal says that if a bank wants to make obscene profits on overdraft fees, then the service will be regulated as credit, but if it keeps prices to a reasonable and proportional level, it has a safe harbor.

The rule gives banks who want to charge overdraft fees a choice: they can charge a reasonable fee, in which the price is closely tied to the cost banks experience from overdrawn account balances, or they can build a profit-generating overdraft service, but as “covered overdraft credit,” with required pricing disclosures and regulatory treatment consistent with credit cards.

“Ideally, more banks would follow the lead of the ones that have eliminated overdraft fees entirely,” said Adam Rust. “But under the CFPB’s new proposal, while a financial institution can still choose to derive profits from overdraft, new disclosure rules will distinguish it unfavorably from its rivals.”

The CFPB believes the new rules will save consumers at least three billion dollars per year.

Some banks have eliminated these fees, others have reduced the penalty and limited the number of charges, but many other institutions still need to alter their practices. In 2022, consumers paid approximately $8 billion in overdraft fees. Before that, annual fees were regularly greater than $11 billion. However, some financial institutions have never changed their policies, and their dependence on those revenues comes at the great expense of their customers.

See the proposed rule and the corresponding fact sheet.

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The critically important Credit Card Penalty Fees rule will help ensure that the late fees charged on credit card accounts are “reasonable and proportional” to the late payment as required under the Truth in Lending Act (TILA). The proposal would adjust the safe harbor dollar amount for late fees to $8 and eliminate a higher safe harbor dollar amount for late fees for subsequent violations of the same type; prevent credit card companies from adjusting the safe harbor dollar amount every year for inflation; and provide that late fee amounts must not exceed 25 percent of the required payment.

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The groups further urged the CFPB to expand supervision to other large non-bank companies that offer similar payment services access through debit cards, prepaid cards, or in person. The comment included specific requests to ensure supervision extends to larger participants in correctional payments services and government benefit cards markets.

The CFPB should move forward expeditiously, as it is vital to ensure payment apps and digital wallets operate under the same rules as traditional payment systems.

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Even though it is hard to find solutions in an area where change is occurring so rapidly, some fixes are evident. The CFPB can significantly advance the purpose of the EO by providing guidance on the non-discriminatory use of artificial intelligence.

Given how rapidly AI is advancing, the CFPB should act expeditiously.  The CFPB has demonstrated its commitment to proceed at a deliberate pace, but the market is impatient. Financial institutions are deploying generative AI for other purposes, but uncertainty remains about addressing longstanding concerns about digital redlining and black boxes. The very limited guidance the CFPB has issued over the last three years since it sought comments on the ethical use of AI to combat discrimination has not materially advanced equity, nor has it clarified what constitutes effective disparate impact monitoring for consumers or the financial services sector. If it has had any impact, the CFPB has not commented publicly. The agency should act soon to take substantive steps to correct this oversight by issuing written guidance to address technologies and standards for oversight of fairness or, at a minimum, providing examples in supervisory highlights and fair lending reports of compliant standards and oversight techniques it has observed in the marketplace.

Although the EO sets out mandatory timetables for executive branch agencies to issue reports and guidance, the language related to the independent federal agencies, such as the CFPB, is far less specific and discretionary. There are only two sections of the EO covering financial services. Nonetheless, both sections are very specific in their ask of the CFPB and other independent agencies. In Section 7.3(b), the Federal Housing Finance Agency (FHFA) and the CFPB are “encouraged to consider using their authorities to require their respective regulated entities, where possible, to use appropriate methodologies using AI tools to ensure compliance with Federal law.” And in Section 8, it calls on independent regulatory agencies to consider using their “full range of authorities to protect American consumers from fraud, discrimination, and threats to privacy and to address other risks that may arise from the use of AI, including risks to financial stability, and to consider rulemaking, as well as emphasizing or clarifying where existing regulations and guidance apply to AI, including clarifying the responsibility of regulated entities to conduct due diligence on and monitor any third-party AI services they use, and emphasizing or clarifying requirements and expectations related to the transparency of AI models and regulated entities’ ability to explain their use of AI models.”

We believe there is a significant need for the CFPB to exercise its authority to provide more specific guidance, particularly on what constitutes adequate technologies and standards for monitoring for disparate impact under the Equal Credit Opportunity Act (ECOA), the primary fair lending law it enforces. To date, the CFPB has been reluctant to provide any written guidance on compliant methodologies and standards. By providing more specific guidance rather than leaving it up to lenders to determine on their own what is compliant, the CFPB will further not only the purposes of the EO, but also limit the possibility of any race to the bottom by the portion of the financial service industry that preys on low-to-moderate income and BIPOC consumers. Because these populations suffer the effects of discrimination, taking action could prevent algorithmically-driven lending from repeating longstanding patterns of discrimination in traditional lending.

Guidance could transform ambiguity into clarity. A recent report by FinRegLab, a non-profit innovation center that tests new data and techniques to inform public policy debates related to the ethical development of financial services, found several areas where additional guidance from the regulators could be helpful. The report noted (p. 41) that the CFPB had issued circulars in 2022 and 2023, which stressed the importance of comparing outcomes between protected classes and white applicants and addressed the use of “post hoc” tools to explain a model’s decision. Nonetheless, the report also found that financial services companies were “using their best judgment in implementing methodologies for testing because there was no federal guidance.” FinRegLab also noted there was no written standard for when an institution should search for a less discriminatory alternative (LDA) or for when certain technologies such as “debiasing” could be used in improving the fairness of a model.  (p. 62-63). Through peer-reviewed research, computer scientists have developed the means to test model fairness and explainability. The needed step is for the CFPB to provide clear guidance on how financial institutions should use them.

Again, the clock is ticking. The CFPB has not issued any substantive guidance on what methodologies and standards further compliance with ECOA, even though more than three years have passed since it sought comments on how it could more effectively promote and oversee effective compliance. Both advocacy groups and financial services companies submitted comments in response to the CFPB’s request and afterward, which included that the CFPB provide guidance on methodologies and techniques for developing and monitoring compliant models, indicate when lenders should search for a less discriminatory alternative (LDA) and offer quantitative thresholds for what constitutes practically-significant disparate impact that warrants further review by the lender.  In the three years since stakeholders responded to the CFPB’s request for information, the CFPB has not issued written guidance on any of these issues except for the two circulars discussed above, which stressed very generally the importance of validating tools and explanations for decisions that impacted consumers.

We must acknowledge one helpful piece of verbal guidance provided by a senior CFPB leader at several conferences who noted that “rigorous searches” for LDAs were an important component of fair lending compliance, but must emphasize that there has been no written guidance from the CFPB on LDAs.

The interests of the public are compromised when well-intentioned actors wait for clarity, while others move ahead, break things, and ask questions later.

These are the costs associated with ambiguity. Mid-size and smaller financial institutions will not invest their resources, hire staff, and move forward without more clarity. The result will be a market dominated by large banks and disrupters. Currently, a handful of financial institutions build their models in-house. Another group, motivated by the opportunity to tap these technologies but without the resources to do so internally, hires third-party vendors. Nonetheless, many financial institutions remain on the sidelines. Practically speaking, this divides markets into the haves and have-nots, with a higher share of the second group consisting of smaller banks. Also, because AI and big data can potentially better serve credit invisibles, the lack of guidance leads to inaction by many in the market and therefore, is a roadblock for the market to advance greater financial inclusion.

The CFPB’s reticence to provide disparate impact guidance appears to be for three reasons.  The primary reason is a practical one – the CFPB may be fearful that it will be sued by conservative trade associations if it issues such guidance. The CFPB has already been sued by trade associations seeking to obstruct its ability to implement several rules, including its small business data collection rule and payday lending rule.

The other two reasons are far more speculative. The CFPB believes that its role is not to hold the hand of the financial services industry by providing thresholds below which no agency action would be likely. We have also heard a concern from some at the CFPB and in the advocacy community that unscrupulous financial services companies could “game” the system by ensuring that their use of AI, including machine learning models, would lead to outcomes below CFPB recommended thresholds, even in scenarios where their practices had a significant discriminatory impact. The latter concern could inform their reticence to provide more specific guidance on thresholds.

We believe the CFPB can address all three of these concerns by fulfilling a core function of its mission, providing summaries of its findings from its supervisory work in either its Supervisory Highlights or Fair Lending reports. It should provide examples of fair-lending compliant methodologies and AI oversight. While the market will certainly draw insight from enforcement actions, those should not be the only data points. Illustrative case studies, published in a form that cloaks the lender’s identity, could appear in supervisory highlights and annual fair lending reports to identify where practices are working and perhaps even more importantly, where they may not be. The independent monitorship of one lender, for example, recently brought to the attention of the public the complexities associated with using education data. At a high level, the CFPB should discuss how lenders are balancing the goals of financial inclusion and accuracy. The market would derive value from understanding the CFPB’s views on the complexities of using AI to comply with the requirements of ECOA and its implementing Regulation B.

Taking these steps to address ambiguity is a reasonable approach to supervising this market. It would not cross the threshold of instructing lenders on which specific algorithms or metrics they should use, nor would it amount to “picking losers and winners” among third-party vendors. In fact, understanding the CFPB’s views could free lenders to innovate with confidence. In practice, this could lead to pro-consumer outcomes and advance the ethical and non-discriminatory use of AI. For example, mid-size and smaller financial institutions that might have felt uneasy devoting resources to adopt more complicated but also more inclusive models would re-evaluate the risk-reward investment decision. That could help level the playing field, bringing immediate benefits to community banks and possibly enhancing financial inclusion in the communities they serve.

The CFPB can also look to the Federal Trade Commission’s (FTC) December 19, 2023 settlement with Rite Aid as an example of using agency authority to provide guidance to limit the discriminatory use of AI. The FTC found that Rite Aid had inadequate safeguards in place on its use of AI biometrics to spot shoplifters, which led to the false identification of women and people of color. Just as this enforcement action can help prevent similar negative discriminatory behavior from others, providing examples of positive and problematic use of AI monitoring by the CFPB could encourage others in the market to take note.

Although providing such information will not address the longstanding calls for specific guidance from the CFPB, it will highlight what the agency has observed in the marketplace which would be very helpful in the interim.  It seems unlikely a conservative group could successfully challenge in court the marketplace observations of the CFPB. Similarly, we doubt a financial service company could somehow “game” observations or use them in a way that would be inconsistent with fair lending principles.  Nor would such observations inappropriately “hold the hand” of financial sector companies.

These examples could include descriptions of techniques lenders have used to achieve fairness goals without significantly compromising the accuracy of their underwriting models.  In the wake of Dodd-Frank, the sustainability of a loan, including an accurate assessment of the borrower’s ability to repay the debt, is a core contributing factor to fairness. The CFPB should also share examples of searches for LDAs that have been employed constructively in the industry. In sum, by providing a bit more transparency, the CFPB would be relaying helpful market information and promoting the purpose of the EO as well as serving consumers. Despite our divisive and litigious culture, such a move by the agency would be relatively non-controversial and provide a clearer path for the ethical use of AI to promote financial inclusion.

Brad Blower is the Founder of Inclusive-Partners LLC which advises non-profits and for-profits on financial inclusion and the ethical use of AI.  Adam Rust is the Director of Financial Services at the Consumer Federation of America.

The post The CFPB Has An Opportunity to Greatly Advance the Ethical and Non-Discriminatory Use of AI in Financial Services and Should Take It appeared first on Consumer Federation of America.

“We applaud the White House for their veto,” said Adam Rust, Director of Financial Services at the Consumer Federation of America. “The 1071 CRA resolution was political theater designed to create talking points for the election. With this veto, the Biden Administration is putting the needs of small business owners first. This veto is a win for job creators and entrepreneurs. Having better data on small business lending will expose discriminatory practices.”  

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Many overdraft and insufficient funds fees deserve to be called ‘surprise fees,’ said Adam Rust, Director of Financial Services for the Consumer Federation of America. The data from this report shows a high share of overdrafters never have trouble paying their bills, and many fee recipients had less expensive forms of credit at their disposal. The CFPB’s report affirms how a strong rule on overdraft fees will protect consumers and improve the transparency of checking account markets.”

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“A national 36% interest rate cap, including all fees, is the simplest way to stop predatory lending and ensure that lenders make responsible loans that borrowers can afford to repay,” said National Consumer Law Center Associate Director Lauren Saunders. “Senator Reed’s bill will prevent predatory lenders from using junk fees to obscure the true price of loans and put borrowers in a debt trap.”  

Caps on interest rates and junk fees are the primary vehicle states can use to protect consumers from predatory lending. The 36% interest rate limit has become the broadly accepted dividing line between responsible lending and destructive credit that harms lives and destroys financial inclusion.

“We commend Senator Reed for introducing legislation that would protect American families from the financial devastation caused by payday and other predatory lenders,” said Mitria Spotser, vice president and director of federal policy at the Center for Responsible Lending. “The Predatory Lending Elimination Act would ensure that the same 36 percent interest rate cap on loans to military servicemembers and their families extends to all Americans.”

A 36% interest rate limit is broadly supported by people across the political spectrum, and strong majorities in both red and blue states have voted to enact rate limits in recent years.

“For too long, predatory lenders have taken advantage of the lack of a uniform national rate cap to evade state interest rate laws through rent-a-bank schemes,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “A single and straightforward all-in rate cap spells an end to that loophole. It will be a huge win for consumers.”

Forty-five states and the District of Columbia currently cap interest rates and loan fees for at least some consumer installment loans, depending on the size of the loan, and about half of the states prohibit high-cost, short-term payday loans. But while some states have cracked down on evasions, others are allowing lenders to pile on more junk fees or to charge high, unaffordable rates that trap low-income consumers in never-ending debt. Lenders have also exploited the lack of rate caps for banks to use “rent-a-bank” schemes to evade state interest rate laws.

“Families saddled with predatory loans are unable to afford basic living expenses, are subject to vehicle repossessions, abusive debt collections, bank account closures, bankruptcy, and other financial harm,” said Kimberly Fountain, consumer financial justice field manager for Americans for Financial Reform. “Americans for Financial Reform applaud Senator Reed’s bill to give America’s most vulnerable communities a fair interest rate cap.”

The Predatory Lending Elimination Act covers all types of lenders, including banks, and would eliminate high-cost, predatory payday loans, auto-title loans, and similar forms of toxic credit across the nation by:

• Preventing hidden junk fees and loopholes.
• Establishing a simple, common sense limit that is broadly supported by the public on a bipartisan basis.
• Simplifying compliance by adopting a standard that lenders already understand and use.
• Upholding the ability of states to adopt stronger protections as needed, such as lower rates for larger loans.

The Act does not apply to residential mortgages, car purchase loans, or loans by federal credit unions, which are already subject to an 18% interest rate cap for most loans and a 28% cap for payday alternative loans.

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“By making it difficult for consumers to report fraud and maintaining policies of not reimbursing victims of imposter scams, Venmo and Cash App are claiming to ‘hear no evil and see no evil,’” said Adam Rust, Director of Financial Services at the Consumer Federation of America.  “Fraudsters will exploit any advantage they can find, and as long as they believe they can operate on a payment app’s platform with impunity, they will harm consumers and small businesses to the tune of billions. We applaud Senators Brown, Reed, and Warren for holding Venmo and Cash App accountable.”

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Ahead of oral arguments, government watchdog Accountable.US released an analysis showing Townstone is receiving direct and indirect support from several conservative organizations and industry groups that have long-criticized the CFPB and its mandate from Congress to protect consumers from predatory practices by lenders. This includes Pacific Legal Foundation (PLF)—considered to be a member of Leonard Leo’s conservative legal network—which currently represents Townstone in its legal fight against the CFPB. Pacific Legal is funded in-part by “Donors Trust,” a conservative group which itself received over $71 million from the 85 Fund in 2021, which Leonard Leo has said “he plans to use to fund conservative causes nationwide.”

Today, consumer advocates are calling on the Seventh Circuit to reverse this harmful decision and make it abundantly clear that credit discrimination is illegal:

“If a lender can discourage protected classes from applying for credit without fear of prosecution,” said Adam Rust, Director of Financial Services for the Consumer Federation of America, “what is to prevent them from putting a ‘whites-only’ sign out front? Laws to prevent discrimination exist to address real problems, and the half-baked theories behind Townstone do not, and the Seventh Circuit must right this wrong by siding with the CFPB.”

 “A corporate mortgage lender accused of discriminatory practices has teamed up with a network of well-funded right-wing special interests to smear the Consumer Financial Protection Bureau, including a group tied to far-right legal kingpin Leonard Leo. The motivation is obvious: greed. It’s the latest chapter in the long-running scheme by corporate CEOs, lobbyists and the right-wing political groups in their pocket to roll back consumer protections so they can cheat and discriminate against working Americans with impunity to pad their profits,” said Liz Zelnick, Director of the Economic Security & Corporate Power Program at Accountable.US.

 Horacio Méndez, President and CEO of the Chicago-based non-profit Woodstock Institute, said, “Racial justice activists founded Woodstock Institute in the heat of the fight against redlining and financial discrimination back in the 1970s. Over the course of the decades since, we continue to find consistent evidence that actions like Townstone’s have a significant negative impact on Black and Brown households’ ability to access financial opportunity in our city.”

 “We cannot allow the Seventh Circuit to gut our right to equal credit under the law. If the ruling was allowed to stand, it would make it easier for lenders to get away with discouraging, dissuading, and steering potential applicants on the basis of their race, sex, or other protected groups. To truly provide the equal credit opportunities promised under the Equal Credit Opportunity Act, federal enforcement agencies must have the power to examine a lender’s steering and marketing behaviors,” said Caroline Nagy, Senior Policy Counsel for Housing, Corporate Power, and Climate Justice at Americans for Financial Reform Education Fund.

 “CFPB v. Townstone is yet another case in the string of far-right legal challenges to the CFPB’s ability to protect consumers, including through the regulation of discriminatory conduct in the financial services industry. This time, they’re seeking to weaponize the First Amendment to limit the agency’s authority and to enable their own discrimination. As our brief on behalf of First Amendment legal scholars makes clear: the First Amendment does protect the right to speak, but it does not prevent the regulation of illegal discrimination,” said Orlando Economos, Legal Fellow, Democracy Forward.

 “Consumers are grateful that the CFPB is determined to see discrimination rooted out of mortgage and other forms of lending,” said Ruth Susswein, Consumer Action’s Director of Consumer Protection. “The CFPB’s appeal in the Townstone case makes clear that fair lending is not an aspiration; it is the fundamental principle.”

“If it stands, the district court’s ruling would make it easier for lenders to discriminate based on illegal factors such as race. This would unjustly deprive people of the credit they need to buy a home, start a business, or pursue other opportunities,” said Mitria Spotser, vice president at the Center for Responsible Lending (CRL). “The district court’s ruling flies in the face of decades of settled law and regulation. This wildly misguided ruling should be reversed.”

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Racially Disparaging Remarks in the Townstone Financial Show

The case concerns the comments made on the Townstone Financial Show, a weekly AM radio call-in show in Chicago sponsored by Townstone Financial, where the hosts took calls to discuss mortgage-related topics. The show had two co-hosts: Townstone’s CEO and a senior loan officer. The show was an important aspect of Townstone’s business, as ninety percent of the company’s loan applicants heard about Townstone from the radio.

In 2020, the CFPB filed the first-ever redlining complaint against a non-bank mortgage lender, alleging the remarks by Townstone executives were discriminatory under ECOA and Regulation B. Subsequently, the US District Court for the Northern District of Illinois granted Townstone’s motion to dismiss the complaint, asserting that ECOA only applies to applicants. That the CFPB brought the case under the leadership of Director Kathy Kraninger, a Republican official who served during the Trump Administration, underscores the extreme nature of the Northern District’s decision.

On Friday, the Seventh Circuit Court of Appeals will hear arguments from the CFPB to reverse the Northern District’s decision.

The attorneys from the Pacific Legal Foundation representing Townstone want to narrow the set of actions that can constitute grounds for a discrimination claim under the Equal Credit Opportunity Act (ECOA) and Regulation B. They excuse racially-motivated disparaging remarks about Black neighborhoods from Townstone executives as “lunk-headed attempts at humor” and ignore their practical effects.

The CFPB alleges that statements made routinely in the show discouraged Black consumers from applying for credit from Townstone Financial.

In the show, the CEO referred to the neighborhood surrounding a grocery store as “a scary place” and the store itself as the “Jungle Jewel,” where patrons “were people from all over the world.” On a different episode, the CEO said Friday to Monday on the Southside of Chicago is “hoodlum weekend” where the police are “the only ones keeping that [area from] turning into a real war zone and keeping it where it’s kind of at.” When a male caller from Markham, Illinois, a city where more than 80 percent of the population is Black, asked how to improve their credit, the host told the caller, “[you’ve] got to keep those women in line in Markham,” and that generally, “it’s crazy in Markham on weekends….you drive very fast through Markham…don’t look at anybody or lock on anybody’s eyes in Markham.” On one occasion, a co-host advised sellers to “take down the Confederate flag.”

Not surprisingly, Townstone’s lending practices were not equitable. Even though Black households comprise 30 percent of Chicago’s population and almost ten percent of its mortgage applicants, Townstone received only 1.4 percent of applications from Black households. Approximately two percent of applicants came from majority-Black census tracts, even though 18.7 percent of Chicago census tracts have that profile. Townstone employed 17 mortgage loan officers during the years when the show ran, but not one was Black. All it took to ensure Black households didn’t apply was to send the message they weren’t welcome – turning them down wasn’t necessary.

 The Decision Is Very Significant for the Future Enforcement of Fair Lending Laws

If affirmed, the Townstone decision would permit lenders to discourage prospective applicants in protected classes from applying for credit. In effect, lenders could put up signs saying Black households were not welcome, and unless those prospective applicants chose to apply anyway, no discrimination could have occurred.

Regulation B, which implements ECOA, prevents creditors from making any “statement … to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”^[1] Any view that Regulation B fails to interpret Congress’ intent, which states that it is “unlawful for any creditor to discriminate against any applicant, with respect to any aspect of a credit transaction,”^[2] lacks merit. As well, Congress gave the Federal Reserve (the authorized agency for ECOA until 2009) permission to use its “judgment” to make regulations to “prevent circumvention or evasion” of the law.

The fact that events in the case have occurred in Chicago adds a sad irony, as it is a city with a long history of racial discrimination in lending and exclusion in housing. White residents excluded Black residents from their neighborhoods based on racially-biased real estate covenants, white mob violence, as well as government-mandated redlining policies at the Federal Housing Administration (FHA). Moreover, using “blockbusting” techniques to stimulate white flight, speculators often bought properties at distressed prices and flipped them to Black households at significant profits.

In the late 1960s, Black residents in Chicago established the Contract Buyers League (CBL) in response to these issues. Because of the attention brought by the CBL and subsequent organizing in Chicago, Congress passed a series of laws to outlaw discrimination. The Fair Housing Act (1968), ECOA (1974), and Community Reinvestment Act (1977) each address core elements of the problems that perpetuated systemic racism. When communities in the same West Side neighborhoods organized to fight redlining, it led to the passage of the CRA.^[3]

Townstone’s perverse theory represents the next stage in a coordinated effort by a network of conservatives to use free speech protections to strip away anti-discrimination laws. In 303 Creative LLC v. Elenis, lawyers successfully argued that a baker could deny services to a same-sex couple on the grounds that doing so was a form of free speech. Townstone is another expansion of a strategy to permit discrimination.

CFA strongly rejects the decision by the Northern District, as it will encourage more discrimination, and supports the CFPB’s efforts to have the decision reversed. The authors of the US Constitution held that “all men are created equal.” To honor their vision and preserve subsequent victories against discrimination, Townstone must be reversed.

^[1] 12 C.F.R. § 1002.4(b).

^[2] 15 U.S.C. § 1691(a).

^[3] Of note, because banks will still have community reinvestment obligations, regulations will prevent them from redlining. As well, Illinois has recently passed a state CRA law that applies to non-bank mortgage lenders like Townstone. But if Townstone isn’t reversed, some communities may be susceptible to losing access to capital from non-bank lenders.

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“Data provides sunshine to prevent practices that undermine a fair economy,” said Adam Rust, Director of Financial Services at the Consumer Federation of America. “The rule will provide transparency in how businesses access credit, protect businesses from discriminatory practices, and ensure that entrepreneurs can get the loans they need to grow their businesses. Let’s remember that small businesses create jobs. Why would those opposing this rule want to shield lenders who apply discriminatory practices?

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“We strongly oppose Congressional efforts to prevent the implementation of the CFPB’s Section 1071 final rule on small business lending data,” said Adam Rust, Director of Financial Services at the Consumer Federation of America. “This rule will advance transparency, support entrepreneurship, and improve competition in the marketplace. Until now, reliable data on small business lending has been difficult to find. But now, lenders will be required to report on where, how, and to whom they make loans, and the CFPB will release that data to the public, where the power of the light it sheds on markets will become a disinfectant against discriminatory and abusive practices. This rulemaking will support the backbone of our economy, small businesses, ensuring they have the funds needed to run and expand their enterprises.”

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From 2015 to 2021, the bank applied a different and more stringent set of criteria to applicants of Armenian origin, and because senior staff understood the practice was unlawful, instructed employees to make up a reason to justify the decision. In its order, the CFPB revealed how Citi trained their employees to apply greater scrutiny to applications from consumers with surnames ending in “ian” and “yan,” and when the applicant lived in a US city with a high concentration of households of Armenian origin. The bank believed Armenian consumers were “prone to crime and fraud,” resulting in disparate impacts that could not be justified by a legitimate, non-discriminatory reason, violating the Equal Credit Opportunity Act and Regulation B. 

The Consumer Federation of America released the following statement:

“It’s an open-and-shut example of intentional discrimination,” said Adam Rust, Director of Financial Services for the Consumer Federation of America. “Through a coordinated plan, Citi singled out a group of applicants for additional scrutiny based solely on their national origin and without any business justification. Financial institutions that exclude groups from getting credit solely because of their national origin by applying blunt-fisted de-risking approaches should take note of this order. Discrimination in financial services is harmful not just to credit applicants but also to the economy and the integrity of our markets. We applaud the CFPB for identifying this practice and issuing an order to end it.”

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