February 26, 2021
The Honorable Al Green
Chair
Committee on Financial Services
Subcommittee on Oversight and Investigations
United States House of Representatives
Washington, DC 20515
The Honorable Andy Barr
Ranking Member
Committee on Financial Services
Subcommittee on Oversight and Investigations
United States House of Representatives
Washington, DC 20515
Dear Chairman Green, Ranking Member Barr and members of the Subcommittee on Oversight and Investigations:
Thank you for the opportunity to submit a written statement regarding the hearing entitled “How Invidious Discrimination Works and Hurts: An Examination of Lending Discrimination and Its Long-term Economic Impacts on Borrowers of Color.” The National Community Reinvestment Coalition and its more than 600 members across the country work to increase the flow of private capital into traditionally underserved communities. As part of this work, we regularly test, monitor and challenge discrimination in financial services and housing.
Discrimination not only stops consumers from accessing fair and equitable credit products, it hurts the economy, “providing fair and equitable lending to Black entrepreneurs might have resulted in the creation of an additional $13 trillion in business revenue over the last 20 years.” [1] There are currently two federal laws that protect consumers from discrimination in the lending arena; the Fair Housing Act and the Equal Credit Opportunity Act. The Fair Housing Act (FHA) was passed in 1968, and the Equal Credit Opportunity Act (ECOA) was passed in 1974. The FHA only covers loans related to residential real estate. The ECOA covers all credit, both personal and commercial, for example, student loans, small business loans, credit cards, auto loans, payday loans, and mortgages. Both the FHA and ECOA have been updated over the years to add additional protected classes that were not originally included. The FHA has also been updated to strengthen its enforcement provisions to allow for organizations and other persons to bring fair housing complaints. However, ECOA, even though it applies to a much wider array of credit products, has not been amended to provide similar enforcement powers.
We applaud the introduction of HR 166, the Fair Lending for All Act, which would create an Office of Fair Lending Testing within the Consumer Financial Protection Bureau (CFPB), add two additional protected classes, and create criminal penalties for violations, three necessary improvements. However, we urge that the bill be amended to update ECOA’s enforcement provisions to provide organizations with standing to bring fair lending cases and ensure that any entity involved in the credit process is subject to ECOA.
Why Update ECOA
Creating a fair lending testing program within the CFPB is an important enhancement to ECOA, but it is not enough. Congress should complement the CFPB’s testing program by also providing organizations and other persons the right to file ECOA cases based upon their testing and investigations, just as they currently can do under the FHA.[2]
Fair lending testing, also known as matched-pair testing, is an enforcement method that uncovers covert discrimination revealed through differences in treatment in the pre-application arena. Testing provides vital evidence of whether applicants were discouraged from applying for credit in violation of ECOA’s implementing Regulation B, Section 1002.4(b)[3] and FHA Section 3605(a)[4] and differences in terms, products, and information. This information is not revealed through required data collection, like the Home Mortgage Disclosure Act, because there is no requirement that lenders collect demographic data at this point in the loan process. As a result, testing is one of the only ways to uncover discrimination in the pre-application phase of the credit process.
In April of 2020, NCRC engaged in matched-pair fair lending testing of small business loans in the pre-application arena while the Paycheck Protection Program (PPP) was available. The PPP is a small business loan created to help small businesses weather the economic effects of the COVID-19 pandemic. What makes the PPP loan unique and special is that it can convert from a loan to a grant. The testing revealed that in the Washington, DC MSA, in “27 out of 63 (43%) tests, there was a difference in treatment with the White tester receiving more favorable treatment than the Black tester… [f]urthermore, we found a double impact in 12 out of 27 (44%) tests where we identified disparate treatment as a part of our fair lending review, lenders not only discouraged the Black testers from applying for a loan but simultaneously encouraged similarly situated White testers to apply for one or more loan products.[5]” These differences in treatment between the White and Black testers violate ECOA.
The CFPB, even with the creation of this new office, cannot conduct fair lending investigations and file enforcement actions based upon this testing for every discriminatory lender that is currently violating ECOA because there are too many different types of lending products and lenders. Since the late 1980s, the U.S. Department of Housing and Urban Development has partnered with local and national fair housing groups to conduct matched-pair testing in the housing arena because it cannot tackle this problem by itself. Furthermore, “[i]n 2018, private, nonprofit fair housing organizations processed 75.01% of complaints, as compared to 19.19% by FHAP agencies, 5.72% by HUD, and .08% by DOJ.”[6] These local groups play a vital role in rooting out discrimination in the housing arena and could be equally valuable in rooting out discrimination in the lending arena. Their investigative services must be expanded to all lending products.
Organizational Standing Under the FHA
No plaintiff can file a lawsuit, either in federal court or with a federal agency, unless they have standing. The 1988 changes to the FHA created the statutory recognition that organizations have organizational standing to pursue discrimination enforcement actions against housing providers. This statutory change incorporated the Supreme Court decision in Havens Realty Corp that organizations have standing under the FHA as long as they can “demonstrate that a diversion of resources and/or a frustration of mission”[7] occurred. These same organizations arguably do not have standing to pursue enforcement actions under ECOA to address discrimination related to other forms of credit. Organizational standing should be expanded to include all lending activity, not just residential-related real estate covered under the FHA.
ECOA’s Current Enforcement Status
Currently, ECOA is not as effective as it could be in combatting discrimination because of limitations in its enforcement provision– section 1691e. The ECOA does not provide clear organizational standing in the statute, potentially limiting who can file an administrative or civil complaint. An individual who has been covertly discriminated against is usually unaware that they have been subjected to illegal activity and thus unlikely to file a complaint; thereby, allowing this inappropriate and illegal behavior to continue. Without the apparent statutory ability for organizations to complement the work of the CFPB’s new Office of Fair Lending Testing by conducting their own audit and complaint-based fair lending testing under ECOA and filing complaints, the office will not succeed in its mission of eliminating invidious discrimination.
Another limitation in ECOA’s usefulness is that it can only be currently applied to a ‘creditor’ who discriminates. It does not encompass other entities that are involved in the credit process, such as business loan appraisers, brokers or secondary market purchasers. By contrast, the FHA more broadly permits cases to be brought against persons involved in any step of a real estate transaction, which can be the primary source of discrimination, such as appraisers, insurance companies and real estate brokers.
How to Update ECOA
ECOA needs to be updated to reflect the similar language used in the FHA so that these two fair lending statutes can work in tandem and provide complete coverage of the credit market. The word “applicant” and “creditor” throughout ECOA needs to be replaced by the word “person” so that anyone who is involved in the credit process who discriminates would be covered. The use of “person” in ECOA will bring the statute into symmetry with the FHA and allow the same organizations that are currently acting as private attorneys general in enforcing the FHA to also enforce the ECOA. Below are a few examples of sections that should be amended to allow for greater protection and coverage by the ECOA.
Section 1691a should be updated as follows:
§1691. Scope of prohibition
(a) Activities constituting discrimination
It shall be unlawful for any creditor to discriminate against any applicant person, with respect to any aspect of a credit transaction—
Section 1691e should be updated as follows:
§1691e. Civil liability
(a) Individual or class action for actual damages
Any creditor person who fails to comply with any requirement imposed under this subchapter shall be liable to the aggrieved applicant person for any actual damages sustained by such applicant person acting either in an individual capacity or as a member of a class.
Conclusion
If the goal of HR. 166 and ECOA are to root out discrimination, changing the terms “applicant” and “creditor” in ECOA to “person” is imperative to explicitly state that ECOA allows for organizational standing and for ensuring that anyone in the credit process who discriminates can be held responsible for their actions. Thank you for the opportunity to comment on this important matter. If you have questions, contact me or Brad Blower, NCRC general counsel, at 202-383-7706.
Sincerely,
Jesse Van Tol
Chief Executive Officer
[1] Peterson, D., Mann, C. (2020). Closing the Racial Inequality Gaps: The Economic Cost of Racial Inequality in the U.S. Citi Bank https://ir.citi.com/%2FPRxPvgNWu319AU1ajGf%2BsKbjJjBJSaTOSdw2DF4xynPwFB8a2jV1FaA3Idy7vY59bOtN2lxVQM%3D
[2] Persons are already defined by ECOA, Regulation B, Section 1002.2(x) as “a natural person, corporation, government or governmental subdivision or agency, trust, estate, partnership, cooperative or association.”
[3] Regulation B, Section 1002.4(b) provides that “a creditor shall not make any oral or written statement, in advertising or otherwise to applicants or prospective applicants that would discourage on a prohibited basis a reasonable person from making or pursuing an application.”
[4] Section 3605(a) provides that “[i]t shall be unlawful for any person or other entity whose business includes engaging in residential real estate-related transactions to discriminate against any person in making available such a transaction, or in the terms or conditions of such a transaction, because of race, color, religion, sex, handicap, familial status, or national origin.
[5] Lederer, A., Oros, S. (2020) Lending Discrimination Within The Paycheck Protection Program. National Community Reinvestment Coalition. https://ncrc.org/lending-discrimination-within-the-paycheck-protection-program/
[6] Augustine L., Cloud C., Frost-Brown S., Goldberg D., Rice L., Soto J., Williams M. (2019) Defending Against Unprecedented Attacks on Fair Housing: 2019 Fair Housing Trends Report. National Fair Housing Alliance. https://nationalfairhousing.org/wp-content/uploads/2019/10/2019-Trends-Report.pdf
[7] Rothstein M., Whtye M. Teeth in the Tiger: Organizational Standing as a Critical Component of Fair Housing Act Enforcement (American Constitution Association, April 2012) page 6; Havens Realty Corp. v. Coleman, 455 U.S. 363, 372 (1982).
