Will FHFA’s fair-lending office fill enforcement void?

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WASHINGTON — When the Federal Housing Finance Agency opened a fair-lending monitoring office last August, there was little fanfare. But the launch of the Office of Fair Lending Oversight stood in contrast to different moves by officials elsewhere in the Trump administration.

Today the FHFA’s Office of Fair Lending Oversight is still somewhat under the radar. It has five employees, technically falls within the agency's Division of Housing Mission and Goals. and has left some observers unclear about its mission. But the new office has offered hope to consumer advocates who were alarmed at efforts by the Consumer Financial Protection Bureau and Department of Housing and Urban Development to cut back on fair-lending enforcement.

“Hopefully, the creation of this office within this administration counteracts some of the other retreats that we've seen the administration take,” said Nikitra Bailey, the executive vice president of the Center for Responsible Lending.

The new office was created under former FHFA Director Mel Watt, an Obama administration appointee. Mark Calabria was later nominated by President Trump to succeed Watt and took the agency's reins in April.

“The office’s mission is to ensure that FHFA’s regulated entities operate consistently with the public interest and with sufficient overall risk management by providing fair, equal and nondiscriminatory access to mortgage credit and housing,” an FHFA spokesperson said.

According to a job posting in 2018 for a supervisory policy analyst in the Office of Fair Lending Oversight, the team is responsible for analyzing the activities of Fannie Mae, Freddie Mac and the Federal Home Loan banks through a fair-housing and fair-lending lens to examine potential discrimination. The office can also require corrective action.

It is unclear if the office's impact would be felt by loan originators in the primary mortgage market, but typically Fannie and Freddie set standards in a variety of areas as a condition for acquiring a loan.

“Fannie and Freddie, they’re secondary market players, but they play a huge role, so we have to watch that office and how aggressive they are, [and] whether it will have an impact on credit score methodology and [automated underwriting systems] as well as the seller guides,” said Stephen Ornstein, the co-leader of Alston & Bird’s consumer financial services team.

The FHFA’s creation of an office dedicated to fair-lending oversight occurred just months after then-CFPB Director Mick Mulvaney announced a restructuring of the consumer bureau's fair-lending office, which formerly had had independent enforcement capability. Those enforcement powers were stripped under the realignment and transferred to the agency's general supervision and enforcement division.

The CFPB currently has a Fair Lending and Opportunity unit housed within the Office of Equal Opportunity and Fairness, but it lacks the authority to go after firms for fair-lending violations.

Meanwhile, HUD also took steps last year to curb its fair-housing guidelines, suspending the Obama-era Affirmatively Furthering Fair Housing rule. The department argued it was too prescriptive and was actually discouraging the production of affordable housing, but fair-housing advocates have criticized HUD's decision.

Last June, HUD also began the process of revising its “disparate impact” standard, a legal theory that opens firms up to enforcement for lending policies that have an unintentional but still-discriminatory effect on minority borrowers.

At least some of the employees staffing the new FHFA office formerly worked at the CFPB, according to LinkedIn pages. Housing advocates say that even if the new office does not prioritize enforcement, it still has the potential to strengthen fair-lending monitoring.

“Our hope is that the office will actually help to really build a real coordination that the current system lacks around fair-lending enforcement and really help to create a more affirmative plan and response to the ongoing challenges that many creditworthy consumers experience in obtaining a mortgage,” Bailey said.

Yet it would be difficult for the FHFA’s Office of Fair Lending Oversight to replace tools that have been weakened at other agencies under the Trump administration without a “more public-facing component,” said Jesse Van Tol, the chief executive of the National Community Reinvestment Coalition.

“Can it fill a void? I don’t know,” he said. “It’s certainly not filling a void right now, given that we haven’t heard anything from this office.” He added that it would not fill that void “without enforcement powers or without some sort of public mechanism that would flag some kind of an issue."

Bailey agreed that "we need to see real enforcement.”

“That's a problem that we've seen throughout the history of the housing finance system is that we've never seen our nation's fair-lending laws rigorously enforced,” she said.

Industry observers are still waiting to get a sense from current CFPB Director Kathy Kraninger on her views about fair lending and the disparate impact theory.

Ornstein said any focus by the FHFA on disparate impact and other fair-lending issues is likely to be relatively broad because Fannie and Freddie don’t originate loans themselves. Yet the new office could operate independently from the CFPB and other agencies, he said.

The FHFA "does have the jurisdiction to say what the GSEs can do, and it doesn’t necessarily conflict with what the CFPB is doing for the people that it directly supervises,” Ornstein said. “A lot of it depends on Kraninger’s approach to disparate impact, but my sense is that they can do it and they could very well be an independent actor in this.”

But Van Tol said it is hard to see how the Trump administration would address disparate impact differently at the FHFA than other agencies.

“I’m not sure that I’m optimistic given this current administration’s view on disparate impact that the Office of Fair Lending [Oversight] at FHFA will be given real power and authority to investigate things,” he said.

Ornstein agreed that the future of the office is ultimately up to the regulator’s priorities.

“A lot of it depends on how aggressive they want to be and what this office wants to do, and whether they want Fannie and Freddie to play a larger role in ferreting out discrimination,” he said.

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