On September 20, 2017, the Consumer Financial Protection Agency (“CFPB”) announced final amendments to Regulation B, which implements the Equal Credit Opportunity Act (“ECOA”), to provide flexibility and clarity to mortgage lenders regarding the collection and retention of information about the ethnicity, sex, and race of certain mortgage applicants. The CFPB also issued proposed policy guidance, with a request for public comment, regarding the loan-level Home Mortgage Disclosure Act (“HMDA”) data reported by financial institutions that the CFPB plans to disclose to the public beginning in 2019.
Regulation B Amendments
ECOA prohibits a creditor from discriminating against an applicant with respect to any aspect of a credit transaction on a prohibited basis, which includes, among other things, race, color, religion, national origin, sex or marital status, or age (provided the applicant has the capacity to contract). To implement ECOA’s antidiscrimination principles, Regulation B generally prohibits a creditor from inquiring about the race, color, religion, national origin, or sex of an applicant or any other person (“applicant demographic information”) in connection with a credit transaction.
The amendments announced by the CFPB are designed to align Regulation B’s rules regarding the collection and reporting of applicant demographic information by mortgage lenders with the CFPB’s 2015 revisions to Regulation C, which implements HMDA and governs the collection, reporting, and disclosure of mortgage lending information, including HMDA’s separate requirement to collect and report applicant demographic information. The revisions to Regulation C go into effect on January 1, 2018.
The amendments make three substantive changes to Regulation B:
- Permitting additional flexibility in the collection of demographic information: Regulation B provides exceptions to the prohibition of creditor inquiries into applicant demographic information. One such exception is that creditors that receive an application for certain dwelling-secured loans are required to collect and retain protected information, including race and ethnicity information. This information is collected in terms of specified racial and ethnic categories that are broad and aggregated (e.g., Asian, Hispanic). However, this aggregated racial and ethnic categorization is somewhat inconsistent with the revisions to Regulation C, pursuant to which creditors must permit applicants to self-identify their race and ethnicity using certain disaggregated racial and ethnic subcategories (e.g., Mexican, Puerto Rican, or Cuban under the aggregate category of Hispanic). To remedy this inconsistency, the Regulation B amendments allow creditors to collect the applicant’s information using either the aggregate ethnicity and race categories or the disaggregated ethnicity and race categories and subcategories required by revised Regulation C. In addition, to standardize the treatment of co-applicants under Regulation B and Regulation C, the amendments clarify that a creditor is permitted, but not required, to collect applicant demographic information from a second or additional co-applicant.
- Removing the 2004 version of the Uniform Residential Loan Application (“URLA”) as a model form: Included in Regulation B are model forms for creditors to use in complying with Regulation B requirements, including a 2004 URLA model form for complying with the requirement to collect and retain certain protected information in connection with dwelling-secured loans. The 2004 URLA does not permit applicants to self-identify using disaggregated ethnicity and race categories. Describing the 2004 URLA as “outdated,” the amendments remove the 2004 URLA as a model form from the Regulation B appendix, and provide two alternative data collection model forms for the purpose of collecting data regarding race and ethnicity (i.e., a form for collecting aggregate applicant race and ethnicity information and a cross-reference to the Regulation C appendix model form for collecting disaggregated applicant race and ethnicity information).
- Allowing lenders to collect information when not required: Under current Regulation B, creditors are prohibited from collecting applicant demographic information unless legally required to do so to comply with ECOA, Regulation B, or other Federal or State statutes or regulations, including Regulation C. The amendments allow creditors to collect information about ethnicity, race, and sex in certain instances when the creditor is not required to report that information under HMDA or Regulation C. The CFPB believes that “allowing voluntary collection will reduce the burden of compliance with Regulation C on some entities and provide certainty regarding Regulation B compliance over time.”
Proposed HMDA Policy Guidance and Request for Public Comment
As noted above, HMDA requires certain financial institutions to collect, report, and disclose information regarding mortgage lending activity to both Federal regulators and the public. HMDA’s statutory goals include: identifying possible discriminatory lending patterns and enforcing antidiscrimination statutes; monitoring whether financial institutions are serving the housing needs of their communities; and assisting in distributing public-sector investment to attract private sector investment as needed. The public disclosure of HMDA data helps effectuate these goals. Nonetheless, as HMDA data has become more granular, public disclosure poses risks to consumer privacy.
As a result, the CFPB has interpreted HMDA to require a balancing test under which the CFPB weighs the risk to applicant privacy interests against the HMDA statutory goals that are facilitated by public disclosure. If the privacy risks are not justified by the public disclosure benefits, the CFPB will modify the HMDA data prior to public disclosure. The proposed policy guidance describes how, beginning in 2019, the CFPB intends to modify the loan-level HMDA data in the event that the risks of public disclosure are not justified by the benefits. For example, the CFPB proposes to exclude certain data fields from the loan-level HMDA data, including but not limited to the universal loan identifier, the address of the property, credit scores used in making the credit decision, the date the credit application was received by the financial institution, and applicant race or ethnicity. The CFPB also proposes to modify the data to reduce the precision of most of the values reported. For example, for reporting the ratio of total monthly debt to total monthly income, the data will be modified to provide a range of ratios (20 percent to less than 30 percent) rather than a specific ratio.
The CFPB seeks public comment on the proposed policy guidance. Comments are due 60 days after the proposed policy guidance’s publication in the Federal Register.