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1 Welcome to Fair Lending Practices Extending credit is a cornerstone of banking. Because of the need society has for lending and credit, Congress has passed a number of acts ensuring that banks distribute credit fairly. In this module we will discuss the laws regarding fair lending practice in the United States. We will provide an overview of the legislation that exists, discuss what you, as a Bank Director, need to know, and review the penalties for noncompliance. To learn about navigation and other features of this e-learning course, click Help. Click Next to continue to the next page. Learning Objectives By the end of this module, you should be fully familiar with the ways in which the following laws ensure fair lending practices in America: The Fair Housing Act (FHA) The Equal Credit Opportunity Act (ECOA) The Home Mortgage Disclosure Act (HMDA) The Community Reinvestment Act (CRA) The Fair Housing Act The Fair Housing Act (FHA) prohibits discrimination based on: Race or color Religion National origin Sex Family status (discrimination against households with children under the age of 18 living with a parent or legal custodian, pregnant women, or persons with legal custody of children under 18) Handicap 1 P a g e

2 Banks and the FHA Bank Directors need to understand the FHA because it prohibits discrimination in housing related lending activities. This means that if your bank considers a person's race, religion, sex, national origin, disability, family status in a loan application, your bank is in violation of the FHA. Banks are also prohibited from: refusing to make a mortgage loan based on any of the above refusing to provide loan information based on any of the above imposing different loan terms based on any of the above As a Bank Director it is your responsibility to ensure FHA compliance at your bank. refusing to make a mortgage loan based on any of the above refusing to provide loan information based on any of the above imposing different loan terms based on any of the above appraising a property differently based on any of the above refusing to purchase a loan based on any of the above FHA Non-Compliance If a bank is found to have violated any part of the FHA it may be ordered to: compensate the parties discriminated against for damages pay a civil money penalty of up to $16,000 for the first violation and $65,000 for subsequent violations pay attorney's fees and costs Frequent FHA complaints can also prevent a bank from expanding. 2 P a g e

3 Equal Credit Opportunity Act The Equal Credit Opportunity Act (ECOA) of 1974 expands on the Fair Housing Act and makes it illegal for a creditor to discriminate against an applicant's request for any type of credit, not just housing related, based on the applicant's: race, color, religion, national origin, sex, marital status, receipt of income derived from any public assistance program, exercise, in good faith, of any right under the Consumer Credit Protection Act, or age (if the person can legally enter into a contract). Banks and the ECOA Bank actions the ECOA considers to be discriminatory: Discouraging someone from applying for credit based on any of the factors mentioned on the previous page Imposing different terms or conditions on the loan based on any of the factors mentioned on the previous page Considering any of the factors mentioned on the previous page during a loan application Considering the racial composition of the neighborhood in which a mortgage applicant wishes to buy a house Asking about a person's plans concerning having and raising children Asking a person if he or she receives alimony or child payments Bank actions the ECOA considers to be discriminatory (continued) Failing to provide information or services relating to, or providing different information or services relating to, any aspect of the lending process, including credit availability, application procedures, and lending standards Discouraging or selectively encouraging applicants with respect to inquiries about or applications for credit Using different standards to evaluate collateral Treating a borrower differently in servicing a loan or invoking default remedies Using different standards for pooling or packaging a loan in the secondary market 3 P a g e

4 ECOA Non-Compliance The penalties for ECOA non-compliance are serious. Banks can be fined up to: $10,000 for a single violation $500,000 or 1% of net worth for class action violations In addition, borrowers can sue a bank if they feel the bank has violated ECOA in any way regarding the borrower's loan. Types of Lending Discrimination The courts have recognized three types of proof of lending discrimination under the ECOA and the FHA: Overt evidence of disparate treatment Comparative evidence of disparate treatment Evidence of disparate impact We will review these types of lending discrimination in greater depth over the next pages. 1. Overt Evidence of Disparate Treatment Overt evidence of discrimination exists when a lender openly discriminates on a prohibited basis. For example: A lender offers a credit card with a limit of up to $750 for applicants aged and $1,500 for applicants over 30. This policy violates the ECOA s prohibition on discrimination on the basis of age. Overt evidence of discrimination also exists even when a lender expresses but does not act on a discriminatory preference. For example: A lending officer tells a customer, We do not like to make home mortgages to Native Americans, but the law says we may not discriminate and we have to comply with the law. This statement violates the FHA s prohibition against statements expressing a discriminatory preference as well as section 202.5(a) of Regulation B, which prohibits discouraging applicants on a prohibited basis. 4 P a g e

5 2. Comparative Evidence of Disparate Treatment Disparate treatment can also be established by comparative evidence. For example: A nonminority couple applies for an automobile loan. The lender finds adverse information in the couple s credit report. The lender discusses the credit report with the couple and determines that the adverse information, a judgment against the couple, was incorrect, as the judgment had been vacated. The nonminority couple is granted a loan. A minority couple applies for a similar loan with the same lender. Upon discovering adverse information in the minority couple s credit report, the lender denies the loan application on the basis of the adverse information without giving the couple an opportunity to discuss the report. This an example of disparate treatment of similarly situated applicants apparently on the basis of a prohibited factor in the amount of assistance and information provided. If a lender has apparently treated similar applicants differently on the basis of a prohibited factor, it must explain the difference. If the explanation is found to be not credible, the bank's regulator may conclude that the lender intentionally discriminated. 3. Disparate Impact A disparate impact occurs when a lender applies a racially (or otherwise) neutral policy or practice equally to all credit applicants but the policy or practice disproportionately excludes or burdens certain persons on a prohibited basis. For example: A lender s policy is to deny loan applications for single-family residences for less than $60,000. The policy has been in effect for ten years. This minimum loan amount policy is shown to disproportionately exclude potential minority applicants from consideration because of their income levels or the value of the houses in the areas in which they live. 5 P a g e

6 The Home Mortgage Disclosure Act The Home Mortgage Disclosure Act (HMDA) enforces fair lending practices by requiring banks to report loan data regarding home purchases, home improvements, and refinancing. The data reported assists the Federal Financial Institutions Examination Council (FFIEC) in determining: if discriminatory lending practices are taking place if banks are meeting the housing needs of the public Data must also be reported for loan purchases. In addition, data must be reported for applications that did not result in originations: a) applications that were approved by the institution but were not accepted by the applicant, and b) applications that were denied, withdrawn, or closed for incompleteness. Finally, data must be reported on certain denials of requests for preapproval of a home purchase loan under a program whereby a lender issues a written commitment covering a specific period of time to lend a creditworthy borrower up to a specific amount. The HMDA and Banks The HMDA requires banks to keep a Loan Application Register (LAR). Every time a customer applies for a home mortgage, the bank is required to make an entry in the HMDA-LAR. The following, among other items, must be included: the purpose of the loan, the amount of the loan, the type of loan, the location of the property, the race, ethnicity, and gender of the borrowers, a statement detailing if the loan was approved or denied, and the reason(s) for approval/denial Banks are required to submit the LAR to the FFIEC. The information in the LAR helps the FFIEC determine if fair lending practices are being employed at that bank. 6 P a g e

7 HMDA Non-Compliance Most HMDA violations are a result of improper recording and reporting of the data contained in the LAR. However, frequent instances of improper recordkeeping and reporting can still result in a bank being found in violation of HMDA. The penalties for HMDA non-compliance are generally civil money penalties. However, it is important to note that the FFIEC will launch an investigation if it suspects a bank is employing discriminatory lending practices. The bank could then be found to be in violation of the FHA or the ECOA and face penalties. The Community Reinvestment Act The Community Reinvestment Act (CRA) of 1974 was passed by Congress to reduce discriminatory lending practices against low-income neighborhoods. The CRA seeks to ensure individuals and businesses investing in low and moderate income neighborhoods have fair access to credit by evaluating banks to determine if they offer loans in all of the communities they are chartered to do business in. Banks and the CRA A CRA evaluation rates a bank's performance on the following factors: Loan to deposit ratio Lending in assessment area Lending to borrowers of different incomes Lending to business of different sizes Geographic distribution of loans Response to complaints The Agency assigns to a bank a rating of outstanding, satisfactory, needs to improve, or substantial noncompliance based on the bank's performance under the lending, investment and service tests, the community development test, the small bank performance standards, or an approved strategic plan, as applicable. Bank Directors need to ensure bank policies and procedures are structured in a way that will maximize the bank's CRA evaluation. 7 P a g e

8 CRA Non-Compliance There are no penalties for CRA non-compliance. However, the bank's CRA rating (determined by the bank's score on the evaluation factors listed on the previous page) is taken into consideration when the bank applies for expansion. A low CRA rating can adversely affect a bank's ability to do something as simple as installing a new ATM. Summary In this course you have learned about the laws and regulations that govern fair lending practices. Specifically, you have learned about: The Fair Housing Act The Equal Credit Opportunity Act The Home Mortgage Disclosure Act The Community Reinvestment Act 8 P a g e