CBAO Fair Lending Webinar

CBAO Fair Lending Webinar

December 12th at 2:00pm

CBAO Member: $145.00

CBAO Non-Member: $195.00

To Register for CBAO Fair Lending Webinar

CLICK HERE

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

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.

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 possible.

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.

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