IBAT invites you to register for the IBAT Fair Lending Webinar: Are You A Violation Waiting to Happen?
on December 12th at 2:00pm
Non Member: $195
Speakers: Karen Neeley, Cox, Smith, Matthews, Inc.; Chet Fenimore, Fenimore, Kay, Harrison & Ford LLP; Shannon Phillips, IBAT
Bankers should be asking themselves some key questions:
- How does my bank’s fair lending program stack up?
- Does my bank’s internal or external fair lending review function meet current expectations?
- Will my bank be prepared for its next fair lending examination?
This webinar will explore the regulation’s most dangerous areas, with
significant references to the fair lending examination procedures to
inform you of what to expect from examiners, as well as common sense
reviews that every bank can use to assure proper adherence to the
regulations. The participant materials will serve as a valuable resource
to assist you in understanding the regulation, and include tools to
assist in your internal review efforts.
Outline of Webinar:
- Portfolio review for evidences of fair lending violation
- Review of Fair Lending Laws (broad overview)
- Review of Select Provisions (common trip wires)
- Review of Recent Enforcement Actions
- Impact of Dodd-Frank on Fair Lending Laws
- Fair Lending “Overlap” into Operations and Deposits
Recent Legal Ease Article
Fair Lending. We continue to see fair lending issues relating to
pricing of consumer loans. The regulators are performing a statistical
analysis to determine whether there is a difference of 25 basis points
or more that is not supportable by a valid, nondiscriminatory business
reason. Most of the exams have focused on Hispanic versus White
borrowers. The examiners use the census list of common Hispanic names
to identify Hispanic borrowers.
Examiners are particularly concerned where there is a recurring
difference in rates that ties to a particular officer. They are looking
for “pattern or practice” of higher pricing for a protected class.
Defending your rates based on the fact that you “know your customers”
and price based on risk will not work unless you have clear policies and
pricing guidelines. Here are some recommendations.
Rate Sheets. Use them for all types of consumer loans, not just
residential mortgages. Establish different brackets for clear,
risk-based factors like credit score, amount of down payment, size of
loan and term. Remember, though, that a policy considering the size of
the loan must not indirectly discriminate against protected classes.
For very small consumer loans, the amount advanced is relevant as to how
the bank will recoup the cost of making that loan.
Deviations. Allow sparingly. Differences/adjustments should be
small in amount and supported by a valid business reason. Require a
senior officer to approve the deviation. Support the request in a
written loan memo.
Training. Require all loan officers and the board to undergo fair lending training on an annual basis.
Remember that if a “pattern or practice” of discriminatory pricing is
found, the bank will be referred to the Department of Justice. Its CRA
rating will be downgraded. It may also be required to make
reimbursement of excessive interest to the protected consumers and could
also be hit with a civil money penalty.
FAIR LENDING: Legal Ease Archive
The mortgage crisis has created an enhanced interest in fair lending
principles. Congress, regulators, and the press are all expressing
concern that predatory lending practices, particularly in the subprime
market, have contributed to problems with regard to foreclosure.
Furthermore, the expanded data on the Home Mortgage Disclosure Act
(HMDA) reports have provided more fodder for review. Unfortunately,
even with the expanded information on the HMDA report, it still does not
include all of the information that reflects a lender’s underwriting
decision. This is a two-edge sword as it would be very expensive for
lenders to also track credit scores and include those on HMDA LARS as
well as the other information currently required.
We are also seeing more fair lending examinations as the HMDA analysis
reflects so-called “outliers.” Thus, even though a compliance exam has
reflected that an institution’s underwriting is nondiscriminatory, a
fair lending examination may still be imposed if the HMDA data indicates
that there are statistically significant differences in interest rates
between different groups.
What is “fair lending”? There isn’t actually a single “fair
lending” act. Rather, this is a shorthand way of referring to several
laws applicable to nondiscrimination in the lending area. These include
the Equal Credit Opportunity Act as implemented by Regulation B, the
Fair Housing Act, which prohibits redlining, and the Community
Reinvestment Act. HMDA is the mechanism by which reports are generated
to evaluate mortgage compliance with the fair lending laws.
What is prohibited? Basically, it is unlawful for a creditor to
discriminate against any applicant with respect to any aspect of a
credit transaction (which includes not only a decision to make a loan
but also its terms) on the basis of race, color, religion, national
origin, sex or marital status, or age; because all or part of the
applicant’s income derives from public assistance programs; or because
the applicant has in good faith exercised any right under the Consumer
Credit Protection Act. These protective classes are found in the Equal
Credit Opportunity Act. The Fair Housing Act is very similar but it
also applies to real estate transactions more broadly including sale of
property, rental, and advertising as well as lending. In addition to
race or color, national original and religion and sex, the Fair Housing
Act also prohibits discrimination based on familial status and handicap.
What constitutes discrimination? Although the statutes do not
explicitly provide for different tests, the regulators have used an
employment style analysis with regard to lending discrimination. Thus,
discrimination could be overt, disparate impact, or disparate
treatment. Overt discrimination is fairly straight forward. This is
where an individual transaction decision about credit is made based
impermissibly on a prohibited basis. Disparate treatment can be
established either by statements revealing that a lender explicitly
considered prohibited factors or by differences in treatment that are
not fully explained by legitimate nondiscriminatory factors. Disparate
impact occurs when a lender applies a facially neutral policy or
practice equally to all credit applicants but that policy or practice
disproportionately excludes or burdens certain persons on a prohibited
basis. An example given by the regulators is a policy by which loans
for single family residences are not made for less than $60,000. If
that minimum amount disproportionately excludes potential minority
applicants, then this could have a disparate impact on minorities.
[note: For home equity loans, the bank may have a business reason for
setting a threshold size in order to recover costs of making the loan.]
Disparate treatment is often shown where a particular group is steered
into a particular type of product that is less favorable than a
non-protected class is directed to.
What are the consequences of fair lending violations? First,
individuals have certain civil rights and can bring a civil suit for
damages. That is not as likely to be a major consideration for most
lenders. The most significant issue is regulatory enforcement.
Depending on the number of violations and whether there is a pattern or
practice, a regulator may seek prospective and retrospective relief.
Prospective relief could include adopting corrective policies and
procedures, training, community outreach, better internal audit controls
and oversight systems, and monitoring of compliance with periodic
reports to the primary federal regulator. Retrospective relief could
include identifying customers who are subject to discrimination and
offering them credit that they were improperly denied or requiring
restitution to injured parties. Civil money penalties are also
What should banks do to avoid fair lending problems? First, make
sure that you have good policies in place to prohibit discrimination.
Next, consider using internal testing, pairing a minority with a
comparable Anglo applicant to determine whether there is any disparate
treatment. Self-testing is protected under Regulation B. Be sure that
you have good training in place to assure that loan officers do not
inadvertently steer protected classes into a more expensive product. In
addition, be sure that you have good HMDA reporting systems in place to
make sure that the data submitted is as accurate as possible. Remember
that it is HMDA reports that trigger additional questions. All too
often HMDA reporting is inadequate or incorrect.
Resources. The publication “A Guide to HMDA Reporting: Getting
It Right!” is an excellent resource. It is available online at the
FFIEC website. There are also some HMDA training programs available at
the FFIEC website. Also consider reviewing the FDIC publication “Side
by Side: A Guide to Fair Lending.” For national banks, look at the
Comptroller’s Handbook on Fair Lending Examination Procedures. All of
these are excellent tools that can assist you in making sure that your
programs are in good shape.