Driving Racial Equity Through Consumer Financial Regulation

One of the first executive orders that President Biden signed on January 20, 2021, was the “Executive Order on Advancing Racial Equity and Support for Underserved Communities Through the Federal Government.” This Executive Order firmly establishes the Biden administration’s efforts to “pursue a comprehensive approach to advancing equity for all, including people of color, and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.”  This Executive Order ushers in the opportunity for regulators such as the Consumer Financial Protection Bureau (CFPB) and Office of the Comptroller of the Currency (OCC) to overturn Trump administration policies and more aggressively enforce regulations around  the Fair Credit Reporting Act (FCRA), Equal Credit Opportunity Act (ECOA) and the Community Reinvestment Act (CRA). David Uejio, the acting director of the CFPB, issued a statement, saying, “It’s also time for the CFPB to take bold and swift action on racial equity.” To this end, Uejio noted the CFPB will look to “elevate and expand existing investigations and exams and add new ones to ensure we have a healthy docket intended to address racial equity.” It is expected that the CFPB will lead the way in examining and enforcing racial equity, leveraging much of the data which the CFPB gathers as part of their Division of Research, Markets and Regulations, as well as complaint data and Home Mortgage Disclosure Act (HMDA) data.

What are Regulators Starting to Do?

Uejio has directed the Division of Research, Markets and Regulations (RMR) to examine metrics on foreclosures, charge-offs, auto loans, and checking account closures to assist in gauging the health of the consumer finance market, shape policy, and assess regulatory actions to promote racial equity. Most notably, the CFPB is preparing “analysis of the most pressing consumer finance barriers to racial equity to inform research and rulemaking priorities.” The RMR and the Supervision, Enforcement & Fair Lending Division will leverage this analysis for policy proposals, examination of credit underwriting models, disparate impact, and fair lending enforcement actions. CFPB will also likely use its complaint database to shape examinations with a view toward ensuring racial equity in consumer finance.

While the majority of examination and enforcement action may come from the CFPB, the OCC and Federal Reserve specifically have also started to focus on the CRA regulations and the Biden administration will likely revisit any Trump administration CRA revisions. While the CRA was originally written to address racial inequities, the examinations have used other proxies for race, such as income and census tract data. CRA is now being looked at more directly with racial equity at the forefront. For mortgages, given that racial data is already collected as a part of HMDA, anticipate regulators to use this information to inform and shape examinations and help to usher in greater racial equity. It is anticipated that the regulators, especially the CFPB, will continue to use, for nonmortgage lenders, their Bayesian Improved Surname Geocoding  as a proxy method for race, which combines geography- and surname-based information into a single proxy probability for race and ethnicity algorithm to analyze business processes in the absence of demographic data.  

Additionally, the COVID-19 pandemic has brought to light struggles for small businesses and their access to credit. All signs are pointing to the CFPB (and the Federal Trade Commission starting to look at how lenders are providing credit to small businesses and applying what is traditionally thought of as consumer regulations ECOA, FCRA, and Unfair, Deceptive, or Abusive Acts or Practices to small-business lending. There is continued movement from the CFPB to establish rule-making around Dodd-Frank Act’s Section 1071,  which amended the ECOA to require that financial institutions collect, maintain, and submit to the CFPB specific information concerning credit applications for women-owned, minority-owned, and small businesses. Section 1071 data collection is expected to impact a wide variety of financial institutions, including depository institutions, online/platform lenders, captive auto finance companies, nonprofit depository institutions, nonprofit lenders, and commercial finance companies, among others. The focus from the CFPB relating to small-business lending has been on discrimination in origination processes, disparate treatment or impact such as redlining, and weaknesses in  compliance management systems around fair-lending oversight. 

The Federal Reserve, which traditionally has stayed away from racial equity issues and focused on economic policy, is now seeking to better understand the relationship between monetary policy and racial equity. As the Fed continues to examine the impacts of monetary and unemployment policy, financial institutions could see the impacts of these studies on interest rates, as well as potential policy mandates on financial institutions to ensure fair access to credit.  

What Can Financial Institutions Do to Address Racial Equity?

At the consumer level, financial institutions should be looking to take the following actions: