Financial Services Litigation & Investigation Monitor : Financial Services Lawyer & Attorney : Perkins Coie Law Firm : Government Investigations, Class Actions

In a 39-29 vote, on October 22, 2009 the House Financial Services Committee approved legislation (H.R. 3126) establishing an independent federal agency charged with overseeing financial products and services. Under the legislation, the Consumer Financial Protection Agency (CFPA) would be an independent agency headed by a Presidentially-appointed and Congressionally-approved Director appointed to a five year term.  The CFPA's responsibilities would include rulemaking, examination and enforcement of financial institutions that provide consumers with financial products and services.  The rulemaking authority of the Federal Reserve Board and other Federal banking regulator agencies under current consumer banking laws would transfer to the CFPA.

A press release from Committee Chairman Barney Frank states that, in addition to having enforcement and broad examination powers, "the agency will closely monitor the marketplace for any new financial products or services that could potentially harm consumers as well as the larger economy. Once the agency identifies these threats or abuses, it will have the power to write rules that can regulate, restrict or ban them. It will also have the power to establish guidelines so that companies issue clear and fair disclosures to customers on products such as credit cards and mortgages. "

The proposed CFPA includes an Office of Fair Lending and Equal Opportunity responsible for enforcement of the Equal Credit Opportunity Act (ECOA), the Home Mortgage Disclosure Act (HMDA), and coordinating with other federal agencies regarding fair lending matters.

The Committee vote is only the first step in what is likely to be a long process towards the creation of a new consumer financial services oversight agency.  Many issues remain, including exemptions for small banks, the remaining scope of the Federal Reserve Board's authority, enforcement powers, and preemption.  The CFPA also faces strong opposition from many corners, including from the American Bankers Association.

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United Security Bancshares Inc., Thomasville, Ala., entered into a settlement agreement with the Department of Justice's Civil Rights Division to resolve allegations that its subsidiary First United Security Bank violated the Fair Housing Act and the Equal Credit Opportunity Act when dealing with African-American borrowers.  According the the Justice Department's press release, the Complaint alleged that the bank charged African-American borrowers higher rates than similarly-situated white borrowers on home mortgage-related loans. The complaint also alleged that the bank engaged in unlawful "redlining" by failing to provide its lending products and services on an equal basis to majority African-American areas in west central Alabama.

Under the Consent Order, which remains subject to court approval, First United Security Bank will invest more than $600,000 to open a new branch in an African-American neighborhood in west central Alabama and take other steps resolve allegations that it engaged in a pattern of discrimination on the basis of race.  The additional steps include investing $500,000 in a special financing program, and spending more than $110,000 for outreach to potential customers, promotion of its products and services and consumer financial education in the redlined areas.

The lawsuit originated from a referral from the Federal Deposit Insurance Corporation (FDIC), according to the DOJ press release.

This is the first Fair Lending case regarding mortgage lending filed by the Justice Department in over a year, and comes on the heals of the FFIEC's release of 2008 HMDA data that, according to  a Wall Street Journal article summarizing the HMDA report, shows that African-Americans and Hispanic whites were far more likely than non-Hispanic whites to be denied last year in applying to refinance.

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A new analysis by the General Accountability Office (GAO) found that the existing fair lending enforcement efforts by bank regulators are not working. In the GAO's Fair Lending report noted that regulators have a fragmented enforcement mechanism that impairs effective fair lending enforcement.  The study also detailed deficiencies in the mortgage data currently made available through the Home Mortgage Disclosure Act (HMDA).  In particular, the GAO found that a lack of data concerning borrower credit risk and race/gender information for non-residential mortgages (i.e., small business loans) limited "agencies' and regulators' capacity to identify potential lending discrimination."

The GAO reports comes at a time when congress is considering President Obama's plan for a single financial services consumer regulator--the Consumer Financial Products Agency.   The GAO report may fuel the arguments of advocates who claim that the current system doesn't work, and that a consolidated enforcement agency is necessary.  The GAO report also renews the debate about the adequacy of the HMDA requirements, and whether lenders should be required to report more information about their lending practices.

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