Sexual Orientation: Protected Class

QUESTION 

A banking department has cited us for a violation of the Equal Credit Opportunity Act, Regulation B. The allegation is that we denied several loans on the basis of sexual orientation. The applicants filed a complaint with the department. I will state the basis of the complaints. Based on their investigation, they issued an administrative demand to review our loan originations for the last three years. 

Other banking departments seem to be interested in this matter and have sent us document requests for loan files and loan logs. When I joined the company as its General Counsel two years ago, I undertook a review of administrative actions going back several years. Nothing like this happened. For the years I reviewed, we did not have complaints caused by violations of Regulation B, particularly, adverse action. 

In drafting our response to the department, I relied on case law, best practices, and specific regulatory guidelines. To ensure I have a deeper understanding of our legal exposure, I want your input on potential procedures that may cause a violation of the ECOA based on sexual orientation. 

What are potential procedures that may cause a violation of the ECOA based on sexual orientation? 

SOLUTION 

ECOA Tune-up 

Fair Lending Tune-up 

RESPONSE 

The Equal Credit Opportunity Act (ECOA), as implemented by Regulation B, prohibits discrimination on a prohibited basis in any aspect of a credit transaction. Prohibited bases under the ECOA are: race, color, religion, national origin, sex, marital status, or age (provided that the applicant has the capacity to enter into a binding contract); the applicant's income being derived from public assistance; or the applicant's exercise in good faith of any right under the Consumer Credit Protection Act or any state law upon which an exemption has been granted by the Consumer Financial Protection Bureau (CFPB). 

For any rejected application, you should provide a written notice that clearly explains the specific principal reason(s) for the decision. The notice must also include the ECOA disclosure and the name of the appropriate federal enforcement agency. 

The prohibited basis doctrine, as applied to sex, includes sexual orientation and gender identity. The Supreme Court ruled, in 2020, in Bostock v. Clayton County that the federal law prohibiting discrimination in employment based on a person's sex includes gender identity and sexual orientation. 

Following this decision, certain federal agencies with regulatory authority for sex discrimination were directed to review their agency procedures and determine whether actions should be taken to align them with the Bostock decision. Subsequently, the CFPB issued an interpretive rule clarifying that the ECOA and Regulation B apply to discrimination in credit transactions based on a person's sexual orientation and/or gender identity. The rule also provided guidance to clarify the requirements. 

The FHA prohibits discrimination based on race, color, religion, sex, familial status, national origin, or disability in the sale, rental, and financing of housing. In 2021, the Department of Housing and Urban Development confirmed that discrimination based on sexual orientation is a violation of the FHA. 

In light of this change, lenders sought to mitigate this risk by updating their policies and procedures to align with the change. For instance, many lenders now include a statement of nondiscrimination in their loan policy, loan advertisements, and applicant disclosures, and on their websites to reflect the ECOA's requirements. Lenders should update these documents to indicate they do not discriminate on the basis of sex, including sexual orientation or gender identity. We have continually urged our clients to conduct staff training on this issue. 

Because your question is very specific with respect to procedures, I am going to keep this article narrowly focused on methods and procedures to prevent violations of ECOA based on sexual orientation. There are surely three actions that must be done to avoid such violations. In my view, these would be 

(1) ensuring that policies and procedures are updated,

(2) training all affected personnel, and

(3) removing such discriminatory practices from credit decisions. 

I will treat them here, with the caveat that implementing these actions correctly and legally throughout the mortgage process requires a rather extensive implementation of various regulations, federal and state, a review that is far beyond the reach of this article.

Risk-Based Pricing Notice: Timing

QUESTION 

We have a question about the risk-based pricing method. Our procedures already cover the required format of the pricing notice and the types of credit covered. What we want to know is when we are required to provide the risk-based pricing notice for closed-end credit transactions. Also, a question that concerns us is if we need to provide it if we are not going to do the loan. 

When are we required to provide the risk-based pricing notice for closed-end credit? 

Do we have to provide the risk-based notice if we don’t do the loan? 

COMPLIANCE SOLUTION 

Policies & Procedures 

ANSWER 

FACTA  (Fair and Accurate Credit Transactions Act), which amended the FCRA (Fair Credit Reporting Act), added a requirement that mandates that if you use a consumer report in connection with an application for, or a grant, extension, of other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through your financial institution, based in whole or in part on a consumer report, then you must provide a notice to the consumer containing specific information. 

The purpose of the requirement is to alert the consumer as to how information in their consumer report and their credit score can affect the terms of credit they receive. It is meant to enable the consumer to assess if there are any errors in their consumer report and, further, allows them to understand better how certain factors may influence their credit standing. 

Timing is a central feature of the risk-based pricing notice (“Notice”). The timing of the Notice depends on the particular situation. However, I can summarize the general timing rules for a closed-end credit transaction.

Suppose you are granting, extending, or offering some other provision of closed-end credit. In that case, the Notice must be provided to the consumer before consummation of the transaction – but not earlier than the time the decision to approve an application for, or a grant, extension, or other provision of, credit is communicated to the consumer by the financial institution required to provide the Notice. 

In the case of a review of credit that has been extended to a consumer, the Notice must be provided to the consumer at the time the decision to increase the APR (Annual Percentage Rate) based on a consumer report is communicated to the consumer by the financial institution required to provide the Notice. 

If no Notice of the increase in the APR is provided to the consumer before the effective date of the change in the APR, the Notice must be provided no later than five days after the effective date of the change in the APR.[i] 

Now, your other question is often asked because the answer does not seem intuitive. You asked if a Notice must be provided if a financial institution does not grant, extend, or otherwise provide credit. 

The short answer is No! 

The requirement to provide a Notice applies only when, based in whole or in part on a consumer report, a financial institution grants, extends or otherwise provides credit to a consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that financial institution. That leads to a brief discussion of adverse action. 

There is an express exception to the Notice requirement when a consumer is provided with an adverse action notice.[ii] Potentially, a financial institution may need to provide a Notice if it grants, extends, or otherwise provides credit and the consumer does not accept the credit, because the deadline by which a Notice must be provided may be reached before the financial institution learns that the consumer will not accept the credit.

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] 75 FR 2724, 12 CFR § 222.73(c); 16 CFR § 640.4(c)

[ii] 75 FR 2724, 2731

Joint Users of Credit Reports

QUESTION 

I am the Compliance Officer of a bank in the northwest. We run credit reports on applications. If we cannot make the loans, we provide them to our investors and other lenders. 

Be that as it may, our regulator suggests we revise our FCRA policy regarding transferring an applicant's credit report to other lenders for processing. They want us to include language requiring an applicant's express consent to transfer the credit report. 

What advice can you offer to revise our FCRA policy for transferring the credit report and application to another lender?

COMPLIANCE SOLUTION

Policies and Procedures 

ANSWER 

Let's begin with some basics about the Fair Credit Reporting Act (FCRA). In general, the FCRA affects any person or entity that is: 

·       A Consumer Reporting Agency (CRA), such as a credit bureau; 

·       Users of the consumer reports that a CRA produces; or 

·       Those who furnish information about consumers to CRAs. 

CRAs have several responsibilities under the FCRA, such as: 

·       Ensuring that consumer reports are provided to others only for a purpose permissible under the FCRA; 

·       Ensuring that consumer reports include required information but not information that is prohibited; 

·       Disclosing information on file to consumers in response to their request; and 

·       Investigating consumers' claims of inaccurate information in a consumer report and correcting the information if it is erroneous. 

Anyone who provides a consumer report to others becomes a CRA[i] and is subject to the regulations governing these agencies. This is true regardless of whether the person prepared the consumer report or provided a copy of a consumer report prepared by someone else. 

For example, if a financial institution obtains a consumer's credit report from a CRA (i.e., a credit bureau), it would become a CRA if it provided a copy of that credit report to anyone else. 

Most financial institutions do not want to become CRAs because they do not want the compliance responsibilities imposed on such agencies. Therefore, most financial institutions do not provide credit reports or information contained in credit reports to third parties unless doing so is specifically permitted under the FCRA. 

Which brings us to joint users of credit reports! 

Lenders are permitted to provide consumer report information to other lenders without violating the FCRA if they are "joint users" of the specific consumer report. Although not contained in the FCRA, this exception is established in a commentary of the Federal Trade Commission (FTC).[ii] 

Lenders who forward credit reports to other lenders jointly involved in a lending decision are not considered CRAs, provided the application is forwarded to the other lenders at the consumer's request. 

A loan application, including the credit report, is forwarded to several investors in many mortgage loan situations. If this exception were not permitted, the lender forwarding the credit report would be considered a CRA under the FCRA. However, because of the exception, the lender and the investors who receive the application and credit report are considered "joint users" involved jointly in the credit decision. 

The key to taking advantage of this exception is that the application is forwarded to these other lenders at the consumer's request: 

"In order for the additional creditors to whom your client forwards the loan application to have a permissible purpose to obtain a consumer report, the potential credit transaction must be initiated by the consumer. For this reason, … a lender may forward a loan application to another lender at the consumer's request. Accordingly, [the lender] must obtain the consumer's consent prior to forwarding such information to additional lenders."[iii] (My emphasis.) 

Note that consumer consent is required to forward the application. 

This leaves open the question of what form such consent should take. In light of this, the FTC concluded that the inclusion in a lender's loan application of a section that enables the consumer to indicate consent for the loan application file to be forwarded to "other lenders" would be 

"… sufficient to satisfy the requirement that subsequent creditors have a permissible purpose to receive the consumer report included in the file. Such action can only be taken, however, in pursuit of the approval of the loan application."[iv] 

Therefore, a consumer's written authorization to submit an application to other lenders should be included in any situation where it may occur. This can be done separately, as part of the application, or as part of a broker agreement with the consumer. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] Fair Credit Reporting Act, Section 603(f); 15 USC section 1681a(f))

[ii] Elucidated regarding an earlier version of the FCRA. See “Joint Users” – FCRA §§ 603(f) and 604(a)(3)(A), Federal Trade Commission Letter, November 20, 1998, Division of Financial Practices, Federal Trade Commission. 16 CFR 600. See also Statement of General Policy or Interpretation; Commentary on the Fair Credit Reporting Act, 55 FR 18804, May 4, 1990, Rules and Regulations.

[iii] Idem

[iv] Op. cit. ii

Reasonable Investigation Standard under the FCRA

QUESTION 

I am the General Counsel for a servicer. You have written many times about RESPA’s requirement that mortgage loan servicers conduct reasonable investigations of QWRs. I don’t think there is a reliable definition of a reasonable investigation in RESPA, and I question whether there is one in the FCRA. 

To me, it seems to come down to an arbitrary and somewhat subjective understanding rather than a concrete, time-tested definition. I would like to be able to rely on something more legally applicable. 

My current concern involves credit repair agencies, about which you have written extensively. In particular, I want to know how a reasonable investigation is described procedurally in the Fair Credit Reporting Act with respect to credit repair agencies involved in potential violations. I am being specific because I am currently handling litigation relating to the FCRA and a credit reporting agency. 

I want to know if there is a reasonable investigative standard or set of requirements to follow that comply with the FCRA. 

What is the reasonable investigative standard that complies with the FCRA? 

ANSWER 

You might be interested in Radford v. LoanCare, LLC,[i] litigation alleging a violation of the Real Estate Settlement Procedures Act (RESPA). The case also examined whether LoanCare had complied with the Fair Credit Reporting Act (FCRA) with respect to the reasonable investigation requirement. 

First, let me set forth the requirements, so you have this information up front. 

The FCRA requires furnishers of information to provide accurate information to Credit Reporting Agencies (CRAs). It also requires them to investigate the accuracy of the information they provided if they receive notice of a dispute from a CRA. 

They must 

(1) conduct an investigation; 

(2) review all relevant information provided by the CRA; 

(3) report the results of the investigation to the CRA; 

(4) if the investigation finds that information is incomplete or inaccurate, report those results to all CRAs to which they provided information; and 

(5) if an item disputed by the consumer is found to be inaccurate or incomplete or cannot be verified after investigation, promptly modify that item, delete that item, or permanently block the reporting of that item. 

If the furnisher fails to comply with these requirements, a consumer may sue for actual damages caused by the failure, and seek punitive damages if the furnisher willfully fails to comply. 

Marcialene Radford claimed that LoanCare negligently and willfully violated the FCRA by failing to conduct a reasonable investigation into her credit disputes and verifying inaccurate information to the CRAs. LoanCare defended by arguing that it had investigated Radford’s payment history and determined the CRAs’ reports were accurate, and Radford did not show damages due to the alleged violation. 

Like RESPA, the FCRA does not define the level of investigation required. It simply requires the investigation to be reasonable. I realize you seem to believe the reasonable investigation standard is “arbitrary” and not “time-tested.” Here, the court concluded that the reasonableness of LoanCare’s investigation was genuinely disputed. 

At the time LoanCare received automated credit dispute verification (ACDV) requests from the CRAs, the loan notes on Radford’s account already reflected repeated disputes in the preceding months regarding her June and July payments, but LoanCare did not even claim that it had reviewed those complaints during its investigation. 

Here’s a takeaway: 

While a furnisher of information need investigate only what is contained in the CRA’s dispute notice as to the nature of the dispute, it must actually investigate. That is, it must conduct some degree of careful inquiry. 

In light of the information provided by Radford’s letter, a reasonable jury could conclude that the failure to examine Radford’s repeated disputes and communications fell short of this standard. 

As for damages, the court pointed out that because Radford had alleged both a negligent and a willful violation, she could recover statutory and punitive damages if she could prove a willful violation even if she did not suffer any actual damages. 

In any event, Radford provided evidence of actual damages by presenting some evidence of emotional distress and evidence that LoanCare’s failure to correct inaccurate information had caused her denial of credit. Specifically, her affidavit asserted that her attempts to co-sign her son’s applications for car loans in July and October 2022 were rejected after the car dealerships made credit inquiries with Equifax and Experian. This evidence was sufficient to present a genuine dispute of material fact regarding Radford’s actual damages. As a result, the court denied LoanCare’s motion for summary judgment. 

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director
Lenders Compliance Group

---

[i] Radford v. LoanCare, LLC, 4:21 CV 1368 CDP (E.D. Mo. May. 2, 2023)

Investigating Direct Disputes

QUESTION

A recent audit of our servicing platform showed that we failed to investigate direct disputes in our reporting to the credit agencies. There seemed to be a gap in how we identified what dispute needed to be investigated and what dispute did not. 

We reviewed thousands of files and found that some of the disputes were definitely miscategorized. Because of the miscategorizing of them, we did not conduct investigations. That led to consumer complaints. Our regulator also contacted us about the consumer complaints. It is coming here in a few weeks to examine our process. 

We found out that our loan servicing software had incorrect rules for identifying the proper categorizing of the disputes. Now, we are putting in new rules and overriding the old rules. This was a preventable calamity. We want your guidance to know when we must conduct an investigation. 

When must we investigate a direct dispute over the information in a credit report? 

What are the exceptions to the requirements to conduct the investigation? 

ANSWER 

To begin, let's be clear about what is a "direct dispute." This is a statutorily defined term.[i] In essence, it is a dispute by a consumer directly to a furnisher – including a furnisher that is a debt collector – concerning the accuracy of any information in a consumer report and pertaining to an account or other relationship that the furnisher has or had with the consumer. 

By the word "accuracy," I mean reported information[ii] about an account or other relationship with the consumer that reflects the terms of and liability for the account (or other relationship), reflects the consumer's performance and other conduct with respect to the account (or other relationship), and identifies the appropriate consumer. 

So, when should you conduct an investigation in connection with a direct dispute involving a consumer report? What is required is a reasonable investigation. There are four primary direct disputes that require a reasonable investigation. Let's consider each of them.

 Required Investigation of a Direct Dispute

 1. The consumer's liability for a credit account or other debt with the furnisher, such as direct disputes relating to whether (a) there is or has been identity theft or fraud against the consumer, (b) whether there is individual or joint liability on an account, or (c) whether the consumer is an authorized user of a credit account;

 2. The terms of a credit account or other debt with the furnisher, such as direct disputes relating to the type of account, principal balance, scheduled payment amount on an account, or the amount of the credit limit on an open-end account;

3. The consumer's performance or other conduct concerning an account or other relationship with the furnisher, such as direct disputes relating to the current payment status, high balance, the date a payment was made, the amount of a payment made, or the date an account was opened or closed; or

 4. Any other information included in a consumer report regarding an account or other relationship with the furnisher that bears on the consumer's creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.[iii] 

Exceptions to Requiring an Investigation of a Direct Dispute 

Concerning the exceptions to the requirements to conduct the investigation, there are two primary exceptions. Specifically, the following direct disputes do not apply to a furnisher if:

(1) The direct dispute relates to:

 a) The consumer's identifying information (other than a direct dispute relating to a consumer's liability for a credit account or other debt with the furnisher, such as name(s), date of birth, Social Security number, telephone number(s), or address(es);

 b) The identity of past or present employers;

 c) Inquiries or requests for a consumer report;

 d) Information derived from public records, such as judgments, bankruptcies, liens, and other legal matters (unless provided by a furnisher with an account or other relationship with the consumer);

 e) Information related to fraud alerts or active duty alerts; or

 f) Information provided to a consumer reporting agency by another furnisher; or

 (2) The furnisher has a reasonable belief that the direct dispute is submitted by, is prepared on behalf of the consumer by, or is submitted on a form supplied to the consumer by a credit repair organization[iv] or an entity that would be a credit repair organization, but for any nonprofit organization which is exempt from taxation under as a 501(c)(3).[v]

Jonathan Foxx, Ph.D., MBA
Chairman & Managing Director 

Lenders Compliance Group

---

[i] 16 CFR § 660.2(b)

[ii] 16 CFR § 660.2(a)

[iii] 16 CFR § 660.4(a)

[iv] As defined in 15 USC § 1679a(3)

[v] 15 USC § 1679a(3)(B)(i). See also, § 501(c)(3) in 26 USC § 501 - Exemption from tax on corporations, certain trusts, etc.

Reasonable Investigation of a Direct Dispute

QUESTION 

One of the findings in our internal audit caused us some concern. The audit found that we did not follow the proper steps in conducting a “reasonable investigation” for FCRA complaints. It says our “direct dispute” procedures were flawed. 

The audit only gave us a brief overview of what should be done to fix the process but no guidance. So, we’re writing to you for some advice. We’ve done some research, but it’s not particularly helpful. We need a more precise outline of what would cause us to conduct a reasonable investigation. 

Here are our two questions:

What is a “direct dispute?” 

What are some criteria that trigger a “reasonable investigation?” 

Thank you so much for your weekly FAQs. We love them! 

ANSWER 

I appreciate your kind words. Ours is a labor of love that shows our commitment to the mortgage community. Through highs and lows, we should look after one another! 

Let’s start with a general understanding of “direct dispute.”[i] It is a term found in the Fair Credit Reporting Act (FCRA) that occurs when a dispute is submitted by a consumer directly to a furnisher (including a furnisher that is a debt collector) concerning the accuracy of any information in a consumer report and pertaining to an account or other relationship that the furnisher has or had with the consumer. 

Your policies and procedures should meet regulatory standards, and they need to be monitored periodically for implementation. In addition to periodic reviews, you should update them as necessary to ensure their continued effectiveness. 

As a furnisher, you must establish and implement reasonable written policies and procedures regarding the accuracy and integrity of the information relating to consumers that your organization furnishes to a consumer reporting agency. The policies and procedures must be appropriate to the nature, size, complexity, and scope of your furnisher’s activities. 

There are several regulatory requirements.[ii] Subject to exceptions, a furnisher must conduct a “reasonable investigation” of a direct dispute if the dispute relates to: 

1. The consumer’s liability for a credit account or other debt with the furnisher, such as direct disputes relating to whether there is or has been identity theft or fraud against the consumer, whether there is individual or joint liability on an account, or whether the consumer is an authorized user of a credit account. 

2. The terms of a credit account or other debt with the furnisher, such as direct disputes relating to the type of account, principal balance, scheduled payment amount on an account, or the amount of the credit limit on an open-end account. 

3. The consumer’s performance or other conduct concerning an account or other relationship with the furnisher, such as direct disputes relating to the current payment status, high balance, the date a payment was made, the amount of a payment made, or the date an account was opened or closed. 

4. Any other information included in a consumer report regarding an account or other relationship with the furnisher that bears on the consumer’s creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living.

Exceptions

There are two exceptions to having to conduct a reasonable investigation. The obligation of a furnisher to conduct a reasonable investigation does not apply if: 

1. The direct dispute relates to:

 

a. The consumer’s identifying information, as name(s), date of birth, Social Security Number, telephone number(s), or address(es). However, the exception does not apply if the direct dispute relates to a consumer’s liability for a credit account or other debt with the furnisher, such as whether there is or has been identity theft or fraud against the consumer, whether there is individual or joint liability on an account, or whether the consumer is an authorized user of a credit account;

 

b. The identity of past or present employers;

 

c. Inquiries or requests for a consumer report;

 

d. Information derived from public records, such as judgments, bankruptcies, liens, and other legal matters (unless provided by a furnisher with an account of other relationship with the consumer); and

 

e. Information related to fraud alerts or active duty alerts. 

2. The furnisher has a reasonable belief that the direct dispute is submitted by, prepared on behalf of, or is submitted on a form that is supplied to the consumer by a credit repair organization[iii] or an entity that would qualify as a credit repair organization but for the exemption for nonprofit entities. 

Jonathan Foxx, Ph.D., MBA

Chairman & Managing Director

Lenders Compliance Group

---

[i] 12 CFR § 222.41

[ii] 12 CFR § 334.43(a)

[iii] 15 USC Section 1679a(3)

Furnishing Inaccurate Consumer Information

QUESTION

Our regulator has cited us for violating the Fair Credit Reporting Act. For some time, we provided consumer information that was outside of the purpose of the relationship we had with the consumer. In some cases, we had not yet established a relationship when we submitted information about the consumer to the credit reporting agency. Consequently, the regulator now says that we acted in the capacity of a consumer reporting agency. 

On top of that, the regulator’s audit shows that we provided information to the credit agencies that were sometimes inaccurate, which triggered consumer complaints. When we got the complaints, we did not correct the information for all the consumers who complained. We did not do a risk assessment to determine how many credit report errors like this occurred. 

I want to revise our policies and procedures to make sure this never happens again. Our attorney says we have furnisher liability under the FCRA. I need some guidance, and I hope you can give me some suggestions.

What are some suggestions to reduce furnisher liability for providing inaccurate consumer information to consumer reporting agencies? 

ANSWER 

The Fair Credit Reporting Act (FCRA) requires any entity that furnishes information about its consumers to a consumer reporting agency to be sure the information is accurate. Your company has made several rather big mistakes. I suggest you undertake a policy and procedure revision, update your change management policy, implement periodic testing, and conduct a risk assessment. You must demonstrate to the regulator that you are taking all appropriate steps to cure the violations and, to the extent possible, ensure they do not recur. 

We typically advise our clients that the information should only relate to the entity’s own relationships with its customers; otherwise, the entity risks becoming a consumer reporting agency itself and is subject to the FCRA’s requirements for consumer reporting agencies. 

More precisely, the FCRA states:[i] 

“A person shall not furnish any information relating to a consumer to any consumer reporting agency if the person knows or has reasonable cause to believe that the information is inaccurate.” (My emphasis.) 

The “knows or has reasonable cause to believe” standard is a potentially burdensome test because it does not explain how much investigation the person must conduct to ensure the information is not inaccurate. Consequently, the FCRA limits the general rule by providing that a person is not subject to the rule if it has specified to the consumer an address for notifying it that specific information is inaccurate. 

A person may choose not to provide an address, but having provided an address, it may not furnish information to a consumer reporting agency if the consumer has notified it, at the address specified, that specific information is inaccurate and the information is, in fact, inaccurate. 

If an entity regularly and in the ordinary course of business furnishes information to one or more consumer reporting agencies about its transactions or experiences with any consumer and has furnished to a consumer reporting agency information it determines is not complete or accurate, it must promptly notify the consumer reporting agency and provide any corrections to that information, or any additional information necessary to make the information provided to the agency complete and accurate. Then, it must not refurnish to the agency any of the information that remains not complete or accurate. 

Section 312 of the Fair and Accurate Credit Transactions Act (FACT Act), adopted in 2003, required federal agencies to issue guidelines and regulations regarding the accuracy and integrity of information furnished by entities to credit reporting agencies. 

The Consumer Financial Protection Bureau’s (CFPB’s) Regulation V requires each furnisher to establish and implement reasonable written policies and procedures concerning the accuracy and integrity of the information furnished. The rules encourage the voluntary furnishing of information and list the objectives that should be accomplished, explain practices that should be implemented (such as a review of existing practices, historical records, and feedback received), and describe components that should be included. 

Consistent with these guidelines, your policies and procedures should promote the following objectives: 

·       Furnish accurate information about loans or other relationships with a consumer so that the furnished information identifies the appropriate consumer, reflects the terms of and liability for those loans or other relationships, and reflects the consumer’s performance and other conduct with respect to the loan or other relationship. 

·       Furnish information about loans or other relationships with a consumer that has integrity so that the furnisher’s records substantiate the information at the time it is furnished, is furnished in a form and manner designed to minimize the likelihood that the information may be incorrectly reflected in a consumer report, and includes the credit limit, if applicable, and in the furnisher’s possession. (The information should include appropriate identifying information about the consumer to whom it pertains and be furnished in a standardized and clearly understandable form and manner and with a date specifying the time period to which the information pertains.) 

·       Conduct reasonable investigations of consumer disputes and take appropriate actions based on the outcome of the investigations. 

·       Update the information as necessary to reflect the current status of the consumer’s loan or other relationship, including, for example, any transfer of a loan to a third party (i.e., by sale or assignment for collection) and any cure of the consumer’s failure to abide by the terms of the loan or other relationship. 

Regarding furnisher liability, I would ask you to consider a recent decision by a federal district court in Texas, where the court considered a claim that a lender had failed to provide accurate information to a third party in violation of the FCRA. The case is Dixon v. Mazda Financial Services, Inc. (“Dixon”).[ii] I don’t think the decision breaks new ground, but it does offer useful information for creditors whose unhappy consumers file FCRA lawsuits. 

Dixon alleged violations of the Fair Debt Collection Practices Act (FDCPA), Truth-in-Lending Act (TILA), and FCRA. The court previously granted summary judgment for Mazda regarding the non-FCRA claims. It dismissed the FDCPA claim because Mazda, as the creditor to whom Dixon’s debt was owed – while in the process of collecting that debt in its own name – was not a “debt collector” within the meaning of the FDCPA. The court granted summary judgment as to the TILA claims because Mazda had fully complied with its disclosure obligations, and its disclosures unquestionably satisfied TILA. The court also dismissed a TILA rescission claim, which plaintiffs too frequently assert in transactions such as Dixon’s – a consumer credit sale of a motor vehicle involving no security interest in a principal dwelling – to which TILA’s right of rescission does not apply. 

As for the FCRA, Dixon alleged that Mazda had illegally furnished personal information to credit reporting agencies. Whether that information was accurate or not, Dixon’s claim failed because the FCRA section he relied on [§ 1681s-2(a)] does not provide a private right of action against a furnisher for failing to provide accurate information. The court noted that this does not mean the section “lacks any true bite.” Rather, the FCRA specifically provides that violations of that section “shall be enforced exclusively” by certain federal and state agencies (for example, the Federal Trade Commission and the CFPB). 

The court then addressed the viability of a possible claim under § 1681s-2(b), which sets forth the responsibilities of a furnisher of information once a consumer reporting agency gives the furnisher notice of a consumer’s dispute about the completeness or accuracy of information provided by the furnisher to the agency. The subsection requires the furnisher to conduct a reasonable investigation of the dispute, report its findings to the credit reporting agency, and modify or delete the incorrect information.

Investor Owned Residential Loans: Risk Assessment

QUESTION

We are a mid-sized mortgage lender focused on investor-owned 1-4 family residential properties. Our underwriting and procedures are risk-based. In the last few years, we have grown considerably. I came on two years ago as the compliance manager. 

Last year, I retained a law firm to handle an audit to evaluate our procedures and overall risk-based audit program. In the end, I do not feel they did not consider important areas, such as underwriting standards, portfolio monitoring, capital treatment, and several qualitative factors. The audit objectives were not clearly defined. 

I am looking for some guidelines and remedies. If we have to do another audit, we do not want to spend as much money as we spent previously. Our policies and procedures are good, but I want more depth, especially because we are scaling up quickly. 

What audit objects and procedures should I consider in a risk assessment? 

ANSWER

There are lenders in the country whose sole or primary loan product involves financing investor-owned, 1-4 family residential properties. Our firm has such clients, and we work closely with them on their specific compliance needs. Most of them have risk-based programs that set up audit objectives and procedures. 

I suggest you contact us to discuss our IORR Tune-up®. The acronym “IORR” stands for “Investor Owned Residential Real Estate.” The intended purpose of the IORR Tune-up® is to promote consistent risk management practices for residential properties where the primary repayment source for the loan is rental income. The fee is probably a fraction of the cost you spent previously. The IORR Tune-up® will likely tell you the information you sought and does it in 60 days. 

For information about the IORR Tune-up®, Contact Us Here.

Lenders are authorized to make loans to investors to purchase or refinance 1-4 family residential real estate (“RRE”) properties for rental to others. Many lenders manage IORR financing like owner-occupied 1-4 family residential loans. However, the credit risk presented by IORR lending is more similar to that associated with loans for income-producing commercial real estate. Because of this similarity, regulators expect lenders to use the same types of credit risk management practices for IORR used for commercial real estate lending. (For banks, this expectation does not change the regulatory capital, regulatory reporting, or HOLA requirements for IORR.[i]) 

Your review should include at least the following audit objectives: 

·    Evaluate whether loan underwriting standards incorporate risks related to IORR loans. 

·    Understand methods for setting loan identification and portfolio monitoring expectations. 

·    Determine whether ALLL[ii] estimation procedures incorporate IORR loan risks and related qualitative factor adjustments, if applicable. 

·    Evaluate the adequacy of internal risk assessment and rating systems to monitor IORR credit risks effectively. 

·    Evaluate continued compliance with regulatory reporting, HOLA[iii], and risk-based capital treatment, if applicable. 

We spend considerable time keeping our clients aware of the federal and state laws and regulations relating to IORR transactions, especially the regulations that implement consumer protection laws, including ECOA, the Fair Housing Act, the Fair Credit Reporting Act, the Home Mortgage Disclosure Act, RESPA, HOEPA, TILA, and the Bank Secrecy Act. Management’s lending processes and origination platforms should ensure compliance with all applicable laws and regulations and provides timely and accurate disclosures to mortgage applicants. Mortgage loan originators and the lender’s staff must be diligent in safeguarding applicants’ and borrowers’ confidential information. 

Lenders and loan officers should provide sufficient information to customers so they fully understand material terms, costs, and risks of the loan products offered. Communication with customers, including advertisements, oral statements, and promotional materials, should provide clear and balanced information about the relative benefits and risks of mortgage loan products. 

Lenders Compliance Group has identified eighteen categories and questions that act as criteria for audit procedures. I will list them, so you can get a sense of how to build a due diligence assessment. The drill-down analysis is extensive. 

1.   Evaluate the institution’s credit risk management expectations for IORR loans. 

Know the risks! IORR has distinct and very different risks involved from traditional 1- to 4-family lending, such as the loans generally being repaid by rent and possibly some of the investor’s personal income, the investor possibly owning multiple properties, vacancies leading to lower revenue, and increased credit risk. 

Thus, it is essential to ensure appropriate policies and procedures suitable for the risks specific to IORR lending. These policies and processes should cover loan underwriting standards; loan identification and portfolio monitoring expectations; allowance for loan and lease losses (“ALLL”) methodologies, if applicable; and internal risk assessment and rating systems. 

2.   Identify if regulatory reporting, HOLA, and risk-based capital treatment are carried out properly.[iv] 

3.   Determine if IORR loans have been classified as residential or commercial. (If they are classified as residential, are they effectively managed as commercial loans?) 

4.   Does the institution exercise prudent underwriting due diligence similar to that required for commercial real estate loans? 

5.   Has an income producing property analysis been conducted? 

6.   Determine if loan structuring documents incorporate commercial-type provisions. 

7.   Are credit and administration issues being handled in a manner consistent with commercial real estate loans? 

8.   Is commercial real estate amortization guidance being followed? What guidelines are used? 

9.   Is guidance on multiple properties being followed? 

10.  Are subordination, non-disturbance, and attornment agreements obtained to cover the following issues? 

11.   Is subrogation considered in the loan agreement? 

12.  Are commercial vs. residential title issues adequately addressed? 

13.  Are loan identification and portfolio monitoring expectations adequately addressed? 

14.  Do internal risk assessment and rating systems include special consideration for IORR loans? 

15.  Does loan monitoring consider critical IORR loan issues, such as higher overall costs, smaller loan size, competition pricing like residential loans, appraisal timing, and environmental testing? 

16.  Have the IORR loans been factored into allowance for loan and lease losses considerations, if applicable? 

17.  Have IORR regulatory exam issues been adequately addressed, such as improper classification, risk rating reviews, LO monitoring, appraisal requirements, and borrower types? 

18.  Have secondary market issues been adequately addressed?