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Fair lending

We’re making progress toward ensuring fair access to credit

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We’re releasing our third annual Fair Lending Report, which details the important strides we have taken over the last year to protect consumers from credit discrimination and increase access to credit.

Our Office of Fair Lending and Equal Opportunity continues to identify and tackle discrimination in different financial markets, such as mortgages, auto loans and credit cards. In 2014, our fair lending actions directed institutions to provide approximately $224 million in monetary relief to about 303,000 consumers. We’ve also ordered companies to provide non-monetary relief to consumers.

Here is a look at the key supervision and enforcement priorities last year.

Mortgage lending

We focused on potential discrimination in mortgage lending, including redlining and underwriting disparities. This past year we worked closely with the Department of Justice and a financial institution and its settlement administrator to distribute $35 million to minority borrowers who were harmed by discrimination, in accordance with a 2013 settlement. We also looked at the integrity of mortgage information reported by mortgage lenders covered by the Home Mortgage Disclosure Act (HMDA).

Auto lending

Our Supervisory Highlights: Summer 2014 summarized our observations in the area of indirect auto lending and offered additional guidance to assist lenders in reducing fair lending risk and complying with Federal consumer financial law. When lenders have not followed the law, we’ve acted to direct institutions to provide remediation to harmed consumers.

Consumer relief in the credit cards market

Last June, we announced an enforcement action against a credit card company that failed to provide certain debt relief offers to consumers based on national origin, in addition to other violations. As a result, the company provided consumer relief to borrowers excluded from these debt relief offers.

Helping recipients of disability income

Seeking relief for harmed consumers is an important part of our work. We also strive to inform institutions about their responsibilities when serving consumers. Last year we issued a compliance bulletin to help lenders avoid imposing illegal burdens on consumers receiving disability income who apply for mortgages. By helping lenders comply with the law, we help recipients of Social Security disability income receive fair and equal access to credit. We also helped by providing information to consumers about their rights as recipients of Social Security disability income.

These are just a few of the developments you can read about in our third Fair Lending Report. We look forward to continuing to advance our work to ensure a fair, equitable, and nondiscriminatory credit market, with equal opportunity for all.

We want to hear from you

We do our job best when we hear from you. You can submit a complaint online or by calling (855) 411-2372. You can also tell us your story, good or bad, about your experience with financial products and services.

Learn more about how you can protect yourself from credit discrimination.

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.

A citation was revised in the linked memo on July 30, 2014.

Our work on fair lending

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For many consumers, access to responsible credit remains a challenge. Without fair and equal access to credit, some people may never reach their financial goals. Worse, some consumers may face discrimination in the process.

That’s why we help to make sure that financial institutions are complying 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, and HMDA requires that covered financial institutions collect and disclose certain information about home mortgage loan applications. HMDA disclosures help with identifying discrimination and enforcing the law.

We’ve created, refined, and implemented a process to focus our supervisory work on areas that present higher risk to consumers when it comes to fair lending. Our supervisory work takes us into institutions to analyze data and review policies and practices in order to evaluate compliance with, and identify potential violations of, ECOA and HMDA.

We’ve also carried out some recent enforcement actions for violations of ECOA and/or HMDA against:

Additionally, we’ve released important information about fair lending, which we hope will benefit consumers, advocates, and industry. We introduced our HMDA Database, which allows the public to study trends in the mortgage market across the nation and in their own communities. We also released two fair lending bulletins to help consumers and industry stakeholders recognize fair lending and access to credit risks in the home mortgage and auto lending markets. And, we’ll continue to work with industry and trade representatives, fair lending, civil rights, consumer and community advocates to make sure that consumers know their rights and that lenders know how to comply with the rules.

We’ve made a lot of progress, but there is more work to do. We’re proud to work for America’s consumers, and we do our job best when we hear from you directly. Tell us your story if you simply want to share an experience with us. You can submit a complaint online or by calling (855) 411-2372 if you have a problem with a mortgage, credit card, or other credit product.

You can find out more about our fair lending work by checking out our most recent report to Congress on fair lending.

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.

Buying a car? Here’s what you need to know

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Today we announced how lenders can take steps to prevent discrimination in auto lending, but there are also steps that every consumer can take to make it more likely that they are getting a good deal on a car loan. If you’re shopping for a car loan, you’re not alone. The average loan for a new car is up to $26,691 – making auto loans an important decision for consumers.

Shop for a car loan before shopping for a car
When you decide to buy a car, there are several options when it comes to getting a loan. You can check with several banks, credit unions, or other lenders to get a pre-approved loan. Get that pre-approval before you go to buy a car and take the pre-approval with you when you go shopping. Having a loan offer in-hand when you shop for the car puts you in a strong position. For most people, concentrating your applications in a short period of time can minimize the effect on your credit score. Any negative effect will be small while the benefits of shopping around could be big.

When comparing loans, make sure you’re comparing all the terms
If you get competing offers from different lenders, including a dealer who offers you financing, you should take a close look at each of the loan terms, including the interest rate, amount financed, and length of the car loan. Some lenders may tell you they can tailor the monthly payments to suit your budget, but that could mean extending the lifetime of the loan. That could mean that you would still owe on the car when you are ready for your next car.

It’s hard for you to know how your interest rate and other loan terms stack up against other consumers in similar situations. Our announcement today is part our effort to protect consumers from unlawful discrimination. You can be a savvy buyer, though, by taking easy steps to negotiate the best deal for yourself – starting by shopping for a car loan before buying the car.

 

Getting an auto loan? Do your homework, shop around, and compare offers. American auto loan debt is $783 billion. The average auto loan is now $26,691.