iIt is now clear that former Vice President Joe Biden will be the next President of the United States. It is also highly likely that the Senate will remain under Republican control and that, consequently, no major financial services legislation will be enacted and the existing bank regulatory structure will remain in place.
Accordingly, any significant financial policy changes by the new administration will be made through the federal bank regulatory agencies. While the Consumer Financial Protection Bureau (CFPB) is likely to revisit certain regulations under the statutes for which it has rulemaking authority, it can be expected that the Biden administration’s progressive agenda will be advanced to a large degree through the use of administrative enforcement as a policy tool.
Commitment to Increase Fair-Lending Enforcement
The CFPB and other financial regulatory agencies, acting in concert with the Department of Justice (DOJ), can be expected to substantially increase enforcement actions in various bank-related areas to further the goals stated in the Biden “Plan to Build Back Better,” which focuses on increasing economic inclusion and combating “systemic racism.” Prominent among the areas of increased focus will be enforcement of the various consumer statutes and regulations that make up the fair-lending body of law. Congressional Democrats and consumer advocacy groups have accused the Trump administration’s banking regulators of failing to adequately enforce these laws, pointing to a decline in fair-lending cases brought by the CFPB and other agencies in recent years. It can be considered certain that a change to more aggressive fair-lending enforcement — and to regulation by enforcement — will follow quickly upon the Biden inauguration.
Under the Obama administration, many fair-lending enforcement actions were brought or threatened under the “disparate impact” theory, under which claims can be brought based solely on statistical calculations suggesting that an organization’s facially neutral policy disparately affects individuals in protected classes — even if the organization had no intent to discriminate. For the most part, the Trump administration moved away from use of the disparate impact theory, which is highly controversial both as a matter of public policy and as to the appropriateness of its use in enforcement of fair-lending statutes — notably the Equal Credit Opportunity Act (ECOA) and the Fair Housing Act (FHA). The Biden platform expressly endorsed the use of disparate impact analysis in the enforcement of fair-lending laws, and those active in the presidential transition team have confirmed that the CFPB under Biden will make greater use of the theory than it had in the Trump years.
Reversal of Recent HUD Disparate Impact Rule
In September 2020, the Department of Housing and Urban Development (HUD) issued a final rule (the 2020 Rule) addressing the legal requirements for disparate impact cases brought under the FHA. The 2020 Rule amends HUD’s 2013 disparate impact regulation with the stated intent of aligning such rule with the analysis applied by the US Supreme Court in Texas Department of Housing and Community Affairs v. Inclusive Communities Project Inc. (Inclusive Communities), which held that disparate impact claims were viable under the FHA but also stated standards for such claims that differed from the 2013 regulation. The promulgation of the 2020 Rule was vehemently denounced by political action groups and progressive members of Congress, and the Biden/Harris campaign pledged to reverse the HUD regulation.
The 2020 Rule became effective on October 24, 2020; however, on the following day, the US District Court for the District of Massachusetts entered a preliminary injunction staying the rule and enjoining its enforcement, pending entry of final judgment on an Administrative Procedure Act (APA) violation claim brought by the plaintiffs against HUD. Given that the district court’s injunction regulation is likely to remain in place at the time of the Biden inauguration, it can be assumed that the 2020 Rule will never go into effect and that HUD will act quickly to overturn the 2020 Rule in early 2021. The net result will be to revive HUD’s 2013 disparate impact regulation, which arguably provides for greater freedom of governmental action in bringing (or threatening) enforcement action against lenders based on disparate impact analysis.
Small-Business Lending Recordkeeping
The CFPB has been in the process of drafting proposed regulations to implement Section 1071 of the Dodd-Frank Act, which amended the ECOA to mandate that lenders compile, maintain, and submit to the CFPB information on the race, gender, and ethnicity of small-business borrower applicants and the results of the loan applications. While an outline of the CFPB’s approach released in September 2020 indicates the agency might provide asset-size exemptions, which could eliminate the burden on small banks, it can be expected that the Biden-appointed CFPB director will alter this approach to exemptions and that the agency will adopt a broad application of Section 1071.
Given the fair-lending policy objectives of the Biden administration, the CFPB will likely proceed quickly to rulemaking under Section 1071. However, in light of the time frames required under the APA to adopt a final regulation, fair-lending enforcement actions are unlikely to result from the lending data collected from financial institutions until well into the Biden administration. While disparate impact enforcement actions stemming from such small-business data may not be imminent, it is important, in view of the assumed broad scope of the Section 1071 rule and the probability of significantly increased compliance burdens, that banks and other lenders monitor the rulemaking process closely.
Reversal of Trump Administration Changes to CFPB Enforcement Structure
In 2018, the Trump administration transferred the supervision and enforcement powers of the CFPB’s Office of Fair Lending and Equal Opportunity to the agency’s Office of Supervision and Enforcement — an action interpreted by progressives as signaling a reduction of CFPB fair-lending oversight and enforcement. The Biden platform expressly stated that his administration will reverse this move, and one of the early actions of the CFPB under the Biden administration will almost certainly be the return of enforcement power to the agency’s fair-lending office. The fair-lending office is likely to resume the active role it had played during the Obama administration in enforcing the ECOA and other fair-lending laws — and in extracting settlements from lenders based on disparate impact analysis.
In October of this year, the CFPB reorganized its Supervision, Enforcement and Fair Lending Division (SEFL) to remove the power to initiate investigations from the Office of Enforcement, requiring instead that the enforcement office’s attorneys receive prior approval or referrals from a separate Office of SEFL Policy & Strategy. This reorganization was attacked by Senator Sherrod Brown, among others, as indicating the CFPB’s lack of commitment to its mission of enforcing federal consumer finance laws, and it will undoubtedly be reversed under the Biden administration.
What Can Financial Institutions Do to Prepare?
While most banks and other lenders will find it impossible to completely avoid disparate impact of lending results, it is important that they recognize the real possibility of investigations by federal regulatory agencies and the DOJ based solely on statistical analysis. Accordingly, each lending institution would be well advised both to conduct a review of its loan programs to determine the extent of possible racial or ethnic disparities and to pay close attention to new fair-lending enforcement actions by the CFPB and other agencies.
