Mortgage execs better prepare for redlining enforcement

The message is not only to originators but servicers as well, compliance lawyers said at MBA Annual panel


Since Rohit Chopra was confirmed as the new director of the Consumer Financial Protection Bureau (CFPB) in September, there’s been one particular word on the lips of mortgage executives. And it gives them chills: redlining.

“We are going to see a lot of emphasis on redlining: when you’re actively, intentionally separating out areas that you choose not to do business,” Troy Garris, co-managing partner at Garris Horn LLP, said during a panel in the Mortgage Bankers Association (MBA) Annual Convention and Expo in San Diego on Monday.

The expectation that redlining will be on the CFPB agenda assumes that Chopra and his team will focus more on enforcement supervision than rulemaking.

“I definitely expect basically to restore back the supervision by enforcement,” said Beji Varghese, a partner in Banking, Insurance & Capital Markets at Guidehouse.

Suzanne Garwood, executive director and associate general counsel at J.P. Morgan Chase, added that “we probably are not expecting rulemaking so much in the agenda for the new CFPB.” According to Garwood, there may be additional interpretations of the law.

The last case involving redlining became public in June 2020. The CFPB, at the time led by Trump appointee Kathy Kraninger, filed a lawsuit against Townstone, a Chicago-based nonbank mortgage lender. It was the first-ever redlining complaint against a nonbank lender.

The CFPB alleged that the company drew almost no applications for properties in African-American neighborhoods in the Chicago metropolitan area from 2014 through 2017. According to the CFPB, the company’s CEO, Barry Sturner, also made statements during weekly conservative radio shows and podcasts discouraging African-American applicants from applying to Townstone for mortgage loans.

During the redlining discussion, one question raised was if regulators can force companies – especially independent mortgage banks that don’t take deposits – to enter, focus, or develop in markets that they haven’t been focusing on because of their business strategies.

“But the CFPB is hard to resist,” said Garris. “Chopra is a fascinating person, very smart, not a lawyer. And he’s not going to be as constricted, I think, by law. He’s going to say: here’s what I want. How do I get there?”

Regarding additional scrutiny over fair lending, compliance lawyers said that clients should ensure that they expand into diversity and inclusion in their businesses. The message applies not only to originators, but to servicers as well.

For example, the Cares Act allowed servicers to negotiate forbearance plans to millions of Americans – the latest reports show 1.1 million people are now in forbearance plans, according to the MBA.

“You need a lot of discretion to resolve situations (with clients). And it is easy to ask: why did you do this for this person and not for person B? It is risky,” said Garris.

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