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Fair Lending-Should We Self-Evaluate?

14 January 2014

Over the past few years, it has become clear that one of the areas of emphasis for examinations will be Fair Lending. For many of the Banks with whom we communicate, Fair Lending Examinations sound like a huge scary mass of rules and regulations that were designed specifically to confuse and haunt compliance departments everywhere!

“Why oh why are they doing this?” you ask yourself. Is it because there just isn’t enough to worry about already? Not at all. In fact, there are some really good reasons why this has become an area of focus. Just look at some testimony from a US House Subcommittee hearing in 2007:

“I have included one case where the lender was twice found in violation of the fair lending laws in Federal court and was rewarded by the regulatory agency by raising its grade to Outstanding and continuing to approve its applications for banking privileges I have [also] included a case where the Department of Justice sued a bank and its vice president for his alleged sexual harassment of female loan applicants, including seeking sexual favors for loan approvals. In this case, the regulatory agency which was examining the bank during the period of the harassment had not done a fair lending examination in six years and had decided that there was no need to do one during the period when the harassment occurred. The bank got a passing CRA rating. [1] ”

Since the time of that testimony the issue of fair lending has broadly increased and expanded. For example, In April 2012, the CFPB issued a bulletin confirming that it plans to apply a disparate impact test in exercising its supervisory and enforcement authority under the ECOA for all types of credit, including mortgage lending. In February 2013, HUD issued a final rule providing that disparate impact can be used to establish liability under the FHA. Use of disparate impact allows the CFPB, HUD, or a private plaintiff to prove unlawful discrimination even if there is no discriminatory intent. And while these rules are currently undergoing some revisions, they make clear that financial institutions regulatory agencies are planning to include all aspects of lending within the purview of fair lending.

Included in some of the most recent fair lending enforcement actions were issues of steering, pricing and underwriting. Current investigations that have not yet been concluded include foreclosure practices, advertising, and monitoring of exceptions to policy for purposes of adverse actions. Wells Fargo Bank settled a fair lending suit initiated by combined regulatory agencies in July 2012.

This renewed and expanded focus on fair lending has its roots in the financial crisis of 2009 and in particular, the experiences of borrowers that are in the subprime market. The market for subprime loans is made up largely of women and minorities. This is the same group of people that ECOA was first designed and enacted to protect. The #2ECOA was first enacted in 1974 as a means of protecting the credit rights of women. The amendments of 1976 added protections for minorities and several other protected classes. Coupled with the Community Reinvestment Act, the Federal Fair Housing Act, state Fair Housing Laws, and in 1989, the Home Mortgage Disclosure Act (HMDA) a complete regulatory scheme was developed aimed at opening credit markets for groups of people who were traditionally shut out. While many economists and essayists have argued over the effectiveness of the regulatory scheme, the facts remain that vast numbers of communities still lack access to the credit markets. Over the years, there have been various studies performed that have determined that women and racial minorities have limited access to credit markets. This is especially true in the housing markets. The experiences of these borrowers continues to be one of higher interest rates, higher rates on foreclosures lowers rates of loan modifications and in many cases extremely high fees.

What about us?

Many community banks have not considered how the regulatory agencies emphasis on fair lending might affect them individually. However, we suggest that now is the time to do a fair lending self-assessment. The point is that in the current environment, there is ample evidence that community banks can and should do all that they can to ensure that Fair Lending compliance is a part of any strong compliance program.

Are you ready? Have you reviewed your Fair lending policies and procedures lately? When was the last time that you reported to the Board on issues of discouragement? Do you know what the credit needs of your local community are? If you cannot definitely answer these and several other questions in this area, now is the time to act! Get help with a fair lending self-assessment!

[1] Testimony of Calvin Bradford for the National Training and Information Center (NTIC) before the Subcommittee on Domestic Policy of the House Committee on Oversight and Government Reform October 24, 2007

James DeFrantz is a Partner in Atlanta-based financial services industry consulting firm Bank Solutions Group. [email protected]