California Gov. Gavin Newson recently signed the California Fair Lending Examination Act into law. The legislation requires the California Department of Financial Protection and Innovation (DFPI) to periodically examine banks, credit unions, and residential mortgage lenders and servicer licensees for compliance with fair lending laws. The act takes effect on January 1, 2027.
The act is a recent example of states expanding their regulatory authority to examine for compliance with – and enforcement of – existing consumer protection laws. This expansion is largely in response to the reduced enforcement and supervision by the Consumer Financial Protection Bureau (CFPB) and other federal agencies, particularly with respect to fair lending laws.
Overview of the law
Under the act, the commissioner must examine banks and credit unions meeting certain Home Mortgage Disclosure Act mortgage data thresholds at least once every four years. Additionally, the commissioner must incorporate fair lending reviews into the existing supervisory framework for mortgage lender and servicer licensees, which are already examined at least once every 48 months. Institutions demonstrating full compliance in their most recent exam may be exempted from future exams or examined less frequently.
Examinations will assess compliance with “any nondiscrimination law applicable to mortgage lending,” including the federal Equal Credit Opportunity Act and Fair Housing Act, California Fair Employment and Housing Act, Holden Act, and Unruh Civil Rights Act. As part of the exam, the commissioner may review books, records and documents and question officers, directors, employees or agents under oath. In lieu of an exam, the commissioner may accept exam reports from reviews conducted by other state or federal agencies, Fannie Mae or Freddie Mac.
Also note that affiliates of banks, credit unions or licensees can be examined on the same terms as the regulated entity itself if the commissioner uncovers documented evidence of unlawful activity involving the affiliate connected to the regulated activities.
Exam findings and resultant enforcement
Following an exam, the DFPI commissioner must issue written findings to the bank’s principals, officers or directors, and take “appropriate steps to ensure correction” of a violation of the nondiscrimination law (including a discriminatory effect under the state Fair Employment and Housing Act that cannot be tied to a legitimate business interest of the entity). Exam findings and reports are not public records and may only be disclosed to the examined entity, law enforcement or other regulators for investigation or enforcement purposes.
A violation of a nondiscrimination law is deemed a violation of the applicable division of the Banking Law, California Credit Union Law, or Residential Mortgage Lending Act. The DFPI may bring an enforcement action for such violations under one of these statutes or under the California Consumer Financial Protection Law.
What’s next
The Act will take effect amid a broad decline in and changes to federal enforcement of antidiscrimination laws. For example, the Federal Trade Commission recently joined the CFPB, Office of the Comptroller of the Currency and Department of Justice in eliminating the theory of disparate impact liability across the federal government in response to an April executive order.
In response, states, including California, have stepped in to fill the void, enhancing their supervision of financial services entities and enforcement of state consumer financial protection statutes. We expect to see continued activity by California, particularly in light of the recent appointment of former CFPB Director Rohit Chopra as the first secretary of California’s newly created Business and Consumer Services Agency, which is designed to coordinate licensing, enforcement and rulemaking efforts across various state departments and bureaus.