lending

CFPB says lenders must use specific and accurate reasons for credit denial

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On September 19, the Consumer Financial Protection Bureau (CFPB) issued guidance to lenders using artificial intelligence and other complex models. The guidance indicates lenders must use specific and accurate reasons when taking adverse actions against consumers.

This means, according to CFPB’s press release, that creditors cannot simply use sample adverse action forms and checklists if they do not reflect the actual reason for the denial of credit.

“Technology marketed as artificial intelligence is expanding the data used for lending decisions, and also growing the list of potential reasons for why credit is denied,” said CFPB Director Rohit Chopra. “Creditors must be able to specifically explain their reasons for denial. There is no special exemption for artificial intelligence.”

The press release indicates creditors that simply select the closest factors from the checklist of sample reasons are not in compliance with the law if those reasons do not sufficiently reflect the actual reason for the action taken. Creditors must disclose the specific reasons, even if consumers may be surprised, upset, or angered to learn their credit applications were being graded on data that may not intuitively relate to their finances.

You can read the entire guidance here.

Lions, and Tigers and Seller Financing, Oh My!

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If you are closing seller financed transactions on primary residences including contracts for deed (hereafter referred to as seller financing), or if you have clients who are accepting seller financing, you should take the time to educate yourself and your clients on the current pitfalls.  Please refer to Martha McConnell’s excellent article entitled “Seller Financing – the New ‘Jabberwocky’!” in the Summer 2014 issue of Chicago Record Title for a detailed report on what has led to this serious concern.

lions1 Because it is a complicated issue, I am not sure I can express a bottom line in any kind of succinct manner, but I will attempt to do so here.

The CFPB has been given the power to supervise and regulate laws that impact seller financing, including the SAFE Act, TILA, the Ability to Repay and Qualified Mortgage Rule, HOEPA and the Loan Originator Rule.

Under the applicable federal rules, it is possible that sellers engaging in seller financing may have to become licensed as “loan originators” or “mortgage brokers”.  The loans may have to be fully amortized, and it is possible that these seller/lenders may have to make determinations and disclosures that have not previously been required. Certain exclusions are available, but the rules are complex and detailed, and should be handled with care.

Inconsistencies between the federal and state versions of the SAFE Act, both of which require licensing and registration of loan originators, is another area of concern.

Clients who fail to become licensed or to fall into an exclusion may find they are unable to foreclose, and may, along with the attorneys who closed the transactions and the title policies that insured them, be subject to claims and litigation. In addition, the CFPB has broad enforcement powers including the power to impose civil monetary penalties ranging from $5,000 to $1 million per day.

This is an area of the law that is going to require monitoring and thought in the coming months. Legislation in South Carolina to address the inconsistencies in our version of the SAFE Act may be one avenue for improvement. In the meantime, please take great care if you or your clients venture into seller financing.