Rohit Chopra has led the Consumer Financial Protection Bureau (CFPB) for less than a month, but one area of examination and enforcement priority is already coming into focus: data.
Emphasis will be placed on how financial institutions use automation to churn out decisions on whether to grant loans or offer other kinds of financial products. The CFPB has also indicated it wants to learn more about how Big Tech firms collect and monetize data.
As a result, experts say financial institutions should focus their compliance efforts addressing potential issues with their firm’s automated decision-making. They should ask themselves whether biases—conscious or unconscious—are creeping into algorithms used to decide who becomes a borrower, at what rate a loan is offered, and what hurdles borrowers must overcome.
Areas of vulnerability
Any company that offers financial services should expect increased scrutiny under a Chopra-led CPFB, experts from law firm Goodwin said during a webinar. Here are some areas where firms could prepare:
- Any department or division that has seen a rapid scaling up during the pandemic should be evaluated for potential compliance missteps, Sabrina Rose-Smith said. “Look at a division that grew too quickly or flew ahead of compliance to meet consumer demand,” she said. “Look at whether people are adequately trained and at the automation used to make decisions.” Making corrections now will inevitably save your firm time and money.
- Decisions that are auto-generated should be scrutinized, said Allison Schoenthal. “Look at your data sources,” she said. The CFPB will want an explanation on how the data and algorithms arrived at certain credit decisions.
- If your firm has an escalation channel, make sure it is monitored. “You want to be monitoring those places where red flags pop up, so you see them before the Bureau does,” Rose-Smith said. Same goes for trends in customer complaints and issues that have been raised by state regulators. Address the issues, document those actions, and your firm will be in a better place if and when the CFPB comes calling.
In comments he made Wednesday to the House Committee on Financial Services, Chopra said the predicted U.S. economy’s rebound from the effects of the COVID-19 pandemic will likely not lift everyone equally. Borrowers who have fallen behind on their mortgage and rent payments and may have depended on federal action to halt foreclosures once again find themselves facing a financial crisis that had only temporarily been placed on hold.
The same goes for small businesses who borrowed money to keep the lights on and were temporarily buoyed by Paycheck Protection Program funds and other government assistance. Household debt—particularly auto and medical—has spiked during the pandemic, Chopra said. The debt burden is falling disproportionally on minority and historically disadvantaged communities, he said.
In his remarks, Chopra said the CFPB under his direction will encourage competition among players in the mortgage lending business, hoping change will drive down rates and benefit borrowers. Similar competitive impetus could lower rates on credit cards or raise rates paid on savings accounts, he said. Chopra said he will model his efforts on the blueprint he used to increase competition in the student loan industry when he previously worked at the CFPB.
Chopra also said the agency will “sharpen its focus on repeat offenders” by more closely monitoring agreements made with companies as part of enforcement actions.
But it is another priority listed in Chopra’s remarks that has drawn the most attention, at least among experts who counsel financial institutions during examinations and enforcement actions.
“We will look for ways to restore relationship banking in an era of big data,” Chopra said. “As automation and algorithms increasingly define the consumer financial services market, there is less transparency into how credit decisions are made. In some cases, these practices can unwittingly reinforce biases and discrimination, undermining racial equity.”
This will be a point of emphasis for the CFPB as it seeks to advance the Biden administration’s social policy goals, said Matthew Sheldon, a partner at law firm Goodwin, in a webinar Thursday.
“He’s going to focus on the dangers of algorithms and their unintentional effects,” Sheldon said of Chopra. ”When he was talking about the dangers of algorithms, and the dangers of unintended effects of algorithms, and banks and other lenders effectively ceding there, in his view, underwriting and credit considerations in algorithms, he called out marketing.”
The CFPB will likely address issues with discrimination in automated decisions on credit as they find them in examinations, added Goodwin Partner Sabrina Rose-Smith.
“This issue with algorithms is high-profile, but do they (the CFPB) have the staff to do it?” she asked. “They’re not going to ignore it when they see it, and when they see it, they’ll put their resources behind it.”
From there, the agency would then turn the investigation into an enforcement action. The CFPB will be looking to partner with other federal agencies—like the Office of the Comptroller of the Currency (OCC) and the Department of Justice (DOJ)—as well as pursuing cases referred to them by state agencies.
Late last week, the CFPB, OCC, and DOJ joined forces in requiring Trustmark National Bank to pay a $5 million civil penalty for alleged discrimination practices as part of a larger coordinated effort between the regulators to combat redlining.
“Trustmark’s conduct was egregious, but at the CFPB, we will also be closely watching for digital redlining, disguised through so-called neutral algorithms, that may reinforce the biases that have long existed,” said Chopra.
The CFPB has also announced its intention to examine the business practices of Big Tech firms as they relate to their operation of payment industries. On Oct. 21, the agency issued a series of orders to Amazon, Apple, Facebook, Google, PayPal, and Square asking questions meant to help it understand the risks to consumers posed by their products and business models. The CFPB might make similar orders to Chinese companies Alipay and WeChat Pay.
Specifically, the agency wants to understand how these companies harvest data and then monetize it; how they restrict the access of users and potentially stifle competition in the online payment industry; and whether these services are complying with federal laws that apply to the traditional financial services industry.
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