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ECOA

Ensuring equal treatment for same-sex married couples

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On June 26, 2013, in United States v. Windsor, the U.S. Supreme Court struck down Section 3 of the Defense of Marriage Act as unconstitutional. This decision has important consequences for our work.

In order to fully implement this decision, we took steps to clarify how the decision affects the rules that we are responsible for. Recently, Director Cordray issued a memo to staff clarifying that, to the extent permitted by federal law, it is our policy to recognize all lawful marriages valid at the time of the marriage in the jurisdiction where the marriage was celebrated. This aligns our policy with other agencies across the federal government.

This policy applies to all of the laws, regulations, and policies that we administer, including the Equal Credit Opportunity Act (ECOA), Fair Debt Collection Practices Act (FDCPA), Truth in Lending Act (TILA), and Real Estate Settlement Procedures Act (RESPA). That means that when it comes to administering, enforcing, or interpreting the laws, regulations, and policies within our jurisdiction, we use and interpret the terms like “spouse,” “marriage,” “married,” “husband,” “wife,” and any other similar terms related to family or marital status to include lawful same-sex marriages and lawfully married same-sex spouses.

To learn more, you can read the memo.

Ally to repay $80 million to consumers it discriminated against

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When you shop for a car, auto lenders work with your auto dealer to offer you financing for your loan. Auto lenders consider the terms of your loan, your credit history, and other factors, to set a risk-based interest rate on your loan.  Many of them have policies that allow an auto dealer to “markup” that interest rate. Lenders use a part of that markup to compensate dealers for the valuable services they perform in arranging financing. Unfortunately, that creates incentives for dealers to charge higher interest rates and may be implemented in a way that results in illegal discrimination.

Ally Financial Inc. and Ally Bank have markup policies that have resulted in illegal discrimination against over 235,000 African-American, Hispanic, and Asian and Pacific Islander borrowers.

Today, along with the Department of Justice (DOJ), we’re ordering Ally Financial Inc. and Ally Bank to pay $80 million in damages to the consumers that were harmed by their discriminatory markup policy between April 2011 and December 2013.

Ally will pay a settlement administrator to contact consumers who are due to receive compensation. Along with the DOJ, we will identify victims and calculate their damages by looking at loan data.

Protections against discrimination

Remember, it’s illegal for a creditor to discriminate in any aspect of a credit transaction based on certain characteristics. If you believe a lender has discriminated against you for any reason, you can submit a complaint online or by calling (855) 411-2372.

You can learn more about the warning signs of discrimination and what you can do to protect yourself.

Protect yourself

In the meantime, watch out for scammers claiming that they will get you money. When large numbers of consumers get damages, scammers sometimes pop up. The scammer may charge you a fee or try to steal your personal information. If someone tries to charge you, tries to get you to disclose your personal information, or asks you to cash a check and send a portion to a third party in order to “claim your refund,” it’s a scam. Please call us at (855) 411-CFPB to report such scams.

Preventing illegal discrimination in auto lending

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Every year, millions of American families buy a car – and it will be one of the most significant purchases they make.

One key priority for us is protecting consumers from the silent pickpocket of discrimination. Discriminatory markups in auto lending may result in tens of millions of dollars in consumer harm each year. The average loan for a new car is up to $26,691, so a higher interest rate can make the total cost of the car much higher.

In March, we released a bulletin to help lenders that offer auto loans through dealerships make sure they are following the law. That bulletin explained that so-called “dealer markup” policies that give dealerships discretion in what interest rates to charge consumers and that create incentives for charging higher interest rates may be implemented in a way that violates the law. Research indicates that lenders’ markup policies may lead to minorities being charged higher markups than other, similarly situated, white consumers.

The auto bulletin indicated that we are engaged in the same type of fair lending analysis and scrutiny that our fellow regulators and the Department of Justice have engaged in for many years. In addition, responsible auto lenders have regularly engaged in similar analyses to monitor their own lending practices for compliance with the law.

Responsible lenders

We know that many lenders are committed to fighting unlawful, discriminatory practices and creating a fair marketplace for all consumers. In the mortgage market, laws and regulations require most lenders to collect and report demographic information about their borrowers so that they and their regulators can analyze which mortgage loans are made or denied and how they are priced, for potentially discriminatory patterns.

However, auto lenders and other non-mortgage lenders are not generally allowed to collect demographic information. Since they don’t collect this data, they use various approaches to make sure they are being fair to their customers.

Let’s say a responsible auto lender wanted to make sure that their female customers are not paying more for a loan than similarly-situated men. Before analyzing the pricing patterns, the lender needs to calculate the likelihood that a borrower is male or female. Without actually recording the gender of each borrower, to substitute, or “proxy,” for gender, responsible lenders often rely on a first name database from the Social Security Administration. The public database contains counts of individuals by gender and birth year for first names occurring at least five times for a particular gender in a birth year. Using statistics, they can determine a probability that a particular applicant is male or female based on the distribution of the population across gender categories for the applicant’s first name.

There are a greater variety of methods to proxy for race and national origin. One method used by lenders to check the probability that an applicant is Hispanic or Asian is to use the last name database published by the Census Bureau, in which the Census Bureau reports, by race and national origin, the percentage of individuals with a given surname. Another method to proxy for race and national origin uses the demographics of the census geography (e.g., census tract or block group) in which an individual’s residence is located, and assigns probabilities about the individual’s race or national origin based on the demographics of that area as reported by Census. This method is also used to proxy the probability that an applicant is African American, and it can be used to proxy for other racial and ethnic groups as well.

The role of regulators

The CFPB and other agencies are charged with making sure lenders are following fair lending laws, whether those lenders are engaged in mortgage lending or other types of consumer lending. For auto and other types of non-mortgage lending, the federal regulatory and enforcement agencies typically engage in similar analyses that use a variety of proxy methods, often drawing from the same public databases used by responsible lenders. Our method integrates two common approaches by combining the respective probabilities generated by the last name and geographical proxies. Research has found that this approach produces proxies that correlate highly with self-reported race and national origin and is more accurate than relying only on the borrower’s last name or geographic location.

Statistical methods are often refined over time. We are committed to staying in dialogue with our sister agencies, lenders and researchers to refine our proxy methods over time, so that we can stop the silent pickpocket of discrimination in various consumer finance markets.

Fulfilling our fair lending mandate

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We are responsible for ensuring “fair, equitable, and nondiscriminatory access to credit” under the Dodd-Frank Act. Today, we submitted a report to Congress on our efforts to fulfill this fair lending mandate. The CFPB has made great strides on this front over the past year, and the Fair Lending Report of the Consumer Financial Protection Bureau describes our accomplishments.

Credit discrimination can result in some borrowers paying more than they should have to for credit—if they are able to get credit at all. In many cases, borrowers don’t know they are paying more for credit than their friends or neighbors are. Not only is this wrong, it’s against the law. And the CFPB is working to stop it.

Congress gave the CFPB authority over large banks, private student lenders, mortgage companies, and certain other businesses that offer credit. We make sure that these businesses comply with federal consumer financial laws, including the Equal Credit Opportunity Act (ECOA) and the Home Mortgage Disclosure Act (HMDA). ECOA protects consumers from credit discrimination. HMDA requires that some financial institutions collect and disclose certain information about home mortgage loan applications. This helps with identifying discrimination and enforcing the law.

Over the past year, the Office of Fair Lending, together with our colleagues in Supervision, has built a system to supervise lenders. We examine lenders to ensure that they comply with ECOA and HMDA. We’ve carried out fair lending reviews at financial institutions across the country. And together with our colleagues in Enforcement, we’ve worked on several fair lending investigations that may result in further action if we find that violations of the law occurred.

Currently, we are in the process of updating the rules that implement ECOA and HMDA. These new rules will help us carry out our fair lending mandate. We’re also talking with consumers and lenders. We help consumers understand their rights, and we make sure lenders know how to comply with the rules. Finally, Congress asked us to examine fair lending issues in specific areas of consumer finance, such as student lending. We presented our findings in July.

We’ve made a lot of progress, but there’s more to do. Moving forward, we will continue to supervise lenders to ensure fair lending compliance. As part of our continued commitment to transparency, we will share our fair lending expectations with financial institutions. We will work with financial institutions to ensure that our exams are carried out efficiently and effectively.

And we’ll continue to talk to consumers. An informed consumer is the first line of defense against discriminatory practices. We are proud to work for American consumers, and we do our job best when we hear from you directly. Tell us your story, and get answers to your financial questions.

Find out more about the Office of Fair Lending and Equal Opportunity. And if you think you’ve been discriminated against by a lender, submit a complaint.

Fair Notice on Fair Lending

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Millions of Americans rely on loans and other credit products to attend college, buy cars, purchase homes, or open businesses. For many of us, access to credit makes it possible to achieve the American Dream of a better life for ourselves and our children. All too often, credit discrimination stands in the way of this access. It keeps worthy borrowers from the tools they need to reach their financial goals.

Credit discrimination is illegal. Under the Equal Credit Opportunity Act (ECOA), a creditor may not discriminate against you because of your race, color, religion, national origin, sex, marital status, or age (as long as you are old enough to enter into a contract). It is also against the law for a creditor to discriminate against you because you receive public assistance income, or because you exercise in good faith any of your rights under the Consumer Credit Protection Act.

Discrimination is not always obvious. A borrower may not realize that she has been the victim of intentional discrimination on the basis of her race or sex. Moreover, lending policies that seem evenhanded can be illegal if they have a disproportionate, negative effect on a group that is protected under ECOA, such as women or seniors. Lending practices that produce these adverse effects are said to have a “disparate impact.” They are unlawful unless they meet a legitimate business need that can’t be met by an alternative that has a less disparate impact. Discrimination that disparately impacts borrowers in violation of the law hurts consumers and can threaten the economic stability of our communities. That is why the law has long recognized this form of unlawful credit discrimination.

The Consumer Financial Protection Bureau is responsible for enforcing the Equal Credit Opportunity Act. The Office of Fair Lending and Equal Opportunity at the CFPB helps ensure that all Americans have fair, equitable, and nondiscriminatory access to credit, and we will use every tool at our disposal to protect American consumers.

Today we are giving fair notice on fair lending. We are letting both lenders and consumers know that in our examination and enforcement work, we will combat unlawful, discriminatory practices—including those that have an illegal disparate impact on protected borrowers. We will look not only at mortgage lending, but also at other types of credit including student loans, loans for cars, and credit cards.

Access to credit is critical to a successful financial future. At the CFPB, we are committed to fighting unlawful, discriminatory practices and creating a fair marketplace for all consumers.

Patrice Ficklin is the CFPB’s Assistant Director for the Office of Fair Lending and Equal Opportunity.

Addressing credit discrimination

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The CFPB is the first federal agency with the primary mission of making consumer financial markets work for American consumers. Congress charged us with ensuring that:

  • All consumers have access to markets for consumer financial products and services; and
  • Markets for consumer financial products and services are fair, transparent, and competitive.

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