CFPB Fair Lending Official Who Raised Data Issues Put On Leave

The Consumer Financial Protection Bureau placed its top fair lending official on leave as the Trump administration pulls back on fair lending enforcement across the government.

J. Frank Vespa-Papaleo, the CFPB’s assistant director for the Office of Fair Lending and Equal Opportunity, was placed on administrative leave late Monday, according to multiple people familiar with the matter who requested anonymity to avoid retaliation.

It’s unclear why CFPB Chief Legal Officer Mark Paoletta, a Trump appointee, elected to sideline Vespa-Papaleo. But Vespa-Papaleo, in an affidavit submitted in litigation over acting CFPB Director Russell Vought’s multiple attempts to fire up to 90% of the agency’s staff, had raised concerns about the agency’s management of a key database for mandated information collected under the Home Mortgage Disclosure Act.

To date, HMDA data collection appears to have moved forward without a hitch, though any degradation of the system could have sweeping implications for the mortgage market, industry watchers said.

Vespa-Papaleo declined to comment. The CFPB didn’t immediately respond to a request for comment.

The CFPB in April said it will no longer focus on redlining in its examination program and has moved to cancel or dial back multiple fair lending settlements.

“It certainly appears as though work within that division has slowed to a crawl and that leadership of the CFPB is not particularly interested in pursuing significant aspects of fair lending,” said Jesse Van Tol, the president and CEO of the National Community Reinvestment Coalition.

President Donald Trump in April ordered federal agencies to stop using disparate impact, which relies on statistical evidence of unintentional bias, in their enforcement work. The Office of the Comptroller of the Currency was the first of the federal financial regulators to officially put that order into practice last month.

Other agencies, such as the Department of Housing and Urban Development and the Federal Housing Finance Agency, are also pulling back on fair lending enforcement.

Key Data

The 1975 Home Mortgage Disclosure Act requires lenders to collect race, gender, nationality, age, and other demographic information about mortgage borrowers. Lenders are also required to record applications, loan originations, and loan denials.

The CFPB then compiles the information into a database that is used by federal and state regulators and law enforcement, private researchers, and mortgage lenders.

Vought sought to terminate nearly all of the CFPB employees charged with overseeing and maintaining the database after he took control of the agency in February. The initial wave of firings was put on hold after the National Treasury Employees Union and other co-plaintiffs sued to block them.

Vought reinstated some employees who maintained the rate spread calculator, a weekly calculation of mortgage rates that relies in part on HMDA data, following complaints from the mortgage industry.

But an April reduction-in-force order that was also put on hold by a federal judge didn’t allow even the CFPB employees maintaining the calculator to stay on, Monica Shelton, the CFPB’s director of regulatory technology, said in an April affidavit.

“Before the RIFs were paused, I became gravely concerned that the HMDA platform might degraded, or needed attention, the lack of trained experts due to the RIF could quickly cause the HMDA platform to devolve, thereby impacting America’s mortgage market,” Vespa-Papaleo said in his declaration.

‘Disastrous’ Potential

The potential degradation of HMDA data would make it much harder for lenders to answer key questions about why some mortgage products are performing better than others and to compare their performance in certain markets with their competitors, said Brendan McKay, the owner of McKay Mortgage Co.

“What you’re really talking about is one of the main tools lenders use to determine risk patterns,” said McKay, who’s also the chief advocacy officer at the Broker Action Coalition, a mortgage broker industry group.

Mispriced risks can spread throughout the system, including into securities backed by Fannie Mae and Freddie Mac and mortgages insured by the Federal Housing Administration and the Department of Veterans Affairs, he said.

“It could be disastrous,” McKay said.

While private mortgage data is available, no data set is as broad or deep as the HMDA data the CFPB maintains, said Greg Oliven, the chief technology officer at mortgage data provider Polygon Research.

“Other data sources fall short on at least one dimension and usually both,” he said in an email.

While lenders may want to keep the HMDA data set pristine for competitive reasons, the Trump administration is removing the threat of enforcement by federal regulators, said Joseph Lynyak, a partner with Dorsey & Whitney LLP who advises financial services companies.

“I’m not sure whether the incentive to use the HMDA data is going to continue if enforcement is going to diminish,” he said.

The Trump administration has already signaled it won’t pursue violations of the Fair Housing Act, the Equal Credit Opportunity Act, and other anti-discrimination laws unless there’s evidence of intentional bias.

State attorneys general and private litigants that rely at least in part on HMDA data to bring discrimination cases will have a tougher time doing so if the data were to become less reliable, Van Tol of the NCRC said.

“It makes it much harder to bring any kind of systemic case,” he said.