An Opportunity to Shed Sunlight on Lender Legal Compliance is Missed

Posted by Josh Silver on November 21, 2016

Bank regulatory agencies including the Consumer Financial Protection Bureau, the Office of the Comptroller of the Currency, and others missed a critically important action to encourage lenders’ compliance with consumer protection law. I’ve previously described how the agencies proposed to reform their consumer compliance rating system, which assigns ratings to lending institutions based on the extent to which they adhere to consumer protection laws. The National Community Reinvestment Coalition (NCRC) has advocated that the agencies should make public their ratings to reveal the extent of compliance.

Agency staff informed me that regulatory agencies are statutorily prohibited from disclosing these ratings. The Freedom of Information Act (FOIA) classifies these ratings as confidential supervisory information that are prohibited from disclosure. Nevertheless, in last week's final ruling about reform to the consumer compliance rating system, the agencies could have stated that they will seek public comment on lenders’ compliance with consumer law, which could influence their examination and rating of lenders. Even if law prohibits disclosure of ratings, the agencies could still seek information from the public on the extent of a financial institutions’ compliance with consumer protection law.

The agencies proposed to rate financial institutions on 12 assessment factors, which are grouped into three categories: board and management oversight, compliance program, and violations of law and consumer harm. The ratings would be on a scale of 1 to 5 with 1 representing the highest rating, and 5 the lowest rating. The final rule enacted the 1 to 5 scale.

In our comments on the proposed rule, NCRC maintained that making public participation a central component of the rating system would heighten the accountability of agency examiners and lenders. Public participation is a core aspect of Community Reinvestment Act (CRA) exams, which assess and rate banks’ lending, investments, and services in low- and moderate-income communities. Examiners are required to consider public input on bank performance. Public input can direct examiners to scrutinize aspects of performance they may have otherwise overlooked since they do not have the direct experience of neighborhood residents who deal with the bank. In addition, the examiners are also motivated to carefully conduct comprehensive exams since they know that the exams will be made public. The same procedures applied to consumer compliance reviews would make the compliance reviews more rigorous.

The agencies understand the power of public disclosure of their review and enforcement actions, and routinely issue press releases when they settle with lending institutions over allegations of redlining, discrimination, or unfair and deceptive practices. The press releases are designed to prevent other lenders from engaging in these practices because they know they will be exposed if they do.

The public release of consumer compliance ratings would be more proactive and effective than issuing press releases after enforcement against illegal actions. Low ratings would encourage lending institutions to clean up compliance systems and avoid illegal actions before injuring consumers. In addition, many lending institutions would be motivated to strive for high ratings and excellent compliance records because that would enhance their reputations with consumers.

While the agencies are statutorily prohibited from releasing ratings, their final ruling could have committed to recommending that Congress change FOIA to allow for public release of ratings. In addition, they could have also instituted a more formal mechanism for fair housing organizations, legal counseling agencies, and members of the public to communicate systematic legal violations of any lender to the agencies, which could then influence their evaluations and consumer compliance ratings.

A secretive and opaque process is counterproductive. Public participation in consumer compliance reviews and public release of ratings would be the most effective deterrence against malfeasance.

Image: By Michelangelo Carrieri, via flickr, CC BY-ND 2.0)

About the author more »

Josh B. Silver is a senior advisor at NCRC, where he produces white papers on the Community Reinvestment Act and fair lending policy and issues. He also serves as an expert on affordable housing and community reinvestment. He returned to NCRC after serving as a development manager engaged in fundraising and research at Manna, Inc., a housing nonprofit developer and counseling agency serving the District of Columbia. He also previously served as Vice President of Research and Policy at NCRC for 19 years. In that capacity, Mr. Silver developed NCRC’s policy positions, produced various research studies, engaged in proposal writing and fundraising, and supervised a staff of research and policy analysts. He has written NCRC testimony submitted to Congress on topics including financial modernization, predatory lending, and the effectiveness of the Community Reinvestment Act (CRA) as well as numerous comment letters to federal banking agencies on subjects ranging from the merger application process and the content and accuracy of home and small business data. Prior to NCRC, Mr. Silver worked at the Urban Institute for five years, where he specialized in housing market analysis and program evaluation. He holds a Master’s degree in public affairs from the Lyndon Johnson School of Public Affairs at the University of Texas in Austin.

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