National Association of Federal Credit Unions. Fair Lending Training (Part I) March 19, Lori J. Sommerfield Counsel BuckleySandler LLP

Transcription

1 National Association of Federal Credit Unions Fair Lending Training (Part I) March 19, 2014 Lori J. Sommerfield Counsel BuckleySandler LLP

2 Order of Presentation Overview of Fair Lending Laws & Regulations DOJ, HUD, CFPB and NCUA: Focus on Fair Lending Recent Fair Lending Enforcement Actions Answers to Most Commonly Asked Fair Lending Questions 2

3 Overview of Fair Lending Laws & Regulations 3

4 Fair Lending Overview What is fair lending? Fair lending means fair, equitable, and nondiscriminatory access to credit for consumers Section 1002(13) of Dodd-Frank Act What does fair lending require? Fair lending requires consistent, objective and unbiased treatment of all consumers without regard to any basis prohibited by law Why is fair lending important? Fair lending is a basic responsibility of all financial institutions; It s the right thing to do to treat all consumers fairly and consistently; It s good business; and Regulators expect full compliance with the fair lending laws 4

5 Fair Lending Legal Framework Two primary federal fair lending laws: Equal Credit Opportunity Act (15 U.S.C et seq.) Implemented by CFPB s Regulation B (12 C.F.R. Part 1002) Fair Housing Act (42 U.S.C et seq.) Implemented by HUD s regulations (24 C.F.R. Part 100) State or local laws may contain additional prohibited bases (e.g., military/veteran status or sexual orientation); consult legal counsel Related federal fair lending law: Home Mortgage Disclosure Act (12 U.S.C et seq.) Implemented by CFPB s Regulation C (12 C.F.R. Part 1003) 5

6 Equal Credit Opportunity Act The Equal Credit Opportunity Act ( ECOA ), which is enforced by the CFPB, is the primary federal fair lending law governing consumer and business lending transactions ECOA, enacted in 1974 and implemented by Regulation B, prohibits discrimination in lending on several bases: Race National origin Age Color Sex Source of income Religion Marital status A consumer s good faith exercise of any right under the Consumer Credit Protection Act 6

7 Equal Credit Opportunity Act (cont.) ECOA and Regulation B prohibit discrimination in any aspect of a consumer or business credit transaction Covers entire credit life cycle, including marketing, advertising, origination, servicing, collections and repossession All credit products and services for both consumer and business purposes ECOA and Regulation B also prohibit certain activities that may impede access to credit, such as discouraging an applicant or requiring a spousal signature on a loan Regulation B specifies acts or practices that are prohibited, permitted or required 7

8 Fair Housing Act The Fair Housing Act ( FHA ), which is enforced by the U.S. Dept. of Housing & Urban Development ( HUD ), is the primary federal law governing fair lending practices for real estate-secured lending The FHA, which was enacted in 1968 as Title VIII of the Civil Rights Act and is implemented by HUD s regulations, prohibits discrimination in any residential real estaterelated transaction on the following bases: Race Handicap Sex National origin Color Religion Familial status 8

9 Intersections: ECOA and the Fair Housing Act Prohibited bases overlap, but they are not the same 9 Both laws prohibit discrimination on the basis of race, color, national origin, sex and religion ECOA: Adds marital status, age, public assistance, and exercise of any right under the Consumer Credit Protection Act FHA: Adds familial status and handicap Because both ECOA and FHA apply to lending and servicing activities, credit unions that engage in mortgage lending and/or servicing may not discriminate in any aspect of a mortgage transaction on any of the bases prohibited by either law A mortgage borrower may bring a lawsuit under both ECOA and FHA, but can only recover damages under one law

10 NCUA Fair Lending Rule Nondiscrimination Requirements (12 C.F.R ) With regard to real estate-related loans, prohibits federal credit unions from, among other things: Engaging in lending practices that discriminate or have the effect of discriminating on the basis of race, color, national origin, religion, sex, handicap, or familial status (having children under the age of 18) Using an appraisal if it knows or should know the appraisal is based on a prohibited basis Engaging in advertising that indicates discrimination on a prohibited basis 10

11 Related Laws: Home Mortgage Disclosure Act Although not a fair lending law per se, the federal Home Mortgage Disclosure Act ( HMDA ) supports the objectives of the ECOA and the FHA HMDA, implemented by Regulation C, requires financial institutions to collect certain data in connection with home purchase and home improvement loans and report lending data on a loan application register to the federal government Regulators use the data to assist in evaluating lender compliance with anti-discrimination laws and other consumer protection laws 11

12 Risks of Non-Compliance Non-compliance with fair lending laws presents several risks to lenders. Risks may arise from actual violations or perception of unfairness or inconsistent treatment. Regulatory risks Adverse examination findings, referrals to U.S. Department of Justice ( DOJ ) for pattern or practice discrimination, and formal/informal enforcement actions Litigation risks Individual and class action lawsuits brought by private parties Reputational risks Public accusations of unfairness or irresponsible lending which may undermine a financial institution s image and damage its reputation in the marketplace, resulting in loss of business, enhanced regulatory scrutiny, and increased exposure to potential lawsuits 12

13 Three Legal Theories of Lending Discrimination Type of Discrimination Overt Discrimination Disparate Treatment Definition Direct evidence that a lender intentionally discriminated on a prohibited basis or expressed a discriminatory preference Circumstantial evidence that a lender intentionally treated similarly situated persons differently on a prohibited basis Example A loan officer refuses to work with an applicant because of the person s race, color, gender, age, or other prohibited basis An African American applicant is given a higher APR on an auto loan than a white applicant with a similar credit risk profile Disparate Impact Evidence that a lender applied a facially neutral policy or practice uniformly to all credit applicants, but the policy or practice has a disproportionate adverse impact on members of a protected class without proper business justification A credit union maintains a minimum loan amount in a mortgage underwriting guideline without providing sufficient business justification 13

14 Disparate Impact Theory Examined Historically, federal regulators have relied on the disparate treatment theory to enforce fair lending laws New focus on whether even neutral policies or practices may have a disparate impact that negatively affects minorities DOJ began aggressively enforcing federal fair lending laws under the disparate impact theory in January 2010 The CFPB has made disparate impact analysis the centerpiece of its fair lending supervision, examination and enforcement program 14

15 Disparate Impact Theory Examined (cont.) Federal courts are split on issue of whether disparate impact claims can be brought under fair lending laws Two recent failed attempts to bring FHA cases before the U.S. Supreme Court (Magner v. Gallagher in 2012 and Mt. Holly in 2013) In February 2013, HUD issued a final rule that establishes standards for bringing a disparate impact case under FHA Three-part, burden-shifting test used to determine whether a policy or practice has a disparate impact Appears to expand grounds for legal challenges by permitting claims that a practice improperly creates, increases, reinforces, or perpetuates segregated housing patterns Many questions left unanswered by rule 15

16 Other Types of Discrimination Redlining Redlining is the practice of denying credit to specific geographic areas due to race, ethnicity or some other protected class of its residents Reverse Redlining Reverse redlining is the opposite concept in which protected classes are targeted for certain products with less favorable terms, conditions and/or pricing on a prohibited basis Steering Steering involves promoting different programs within a loan type with less favorable terms, conditions or pricing to otherwise qualified borrowers in a way that treats them differently on a prohibited basis 16

17 DOJ, HUD, CFPB and NCUA: Focus on Fair Lending 17

18 Financial Fraud Enforcement Task Force: Non-Discriminatory Working Group Financial Fraud Enforcement Task Force ( FFETF ) was established in 2009 by President Obama to wage aggressive, coordinated effort to investigate and prosecute financial crimes The FFETF consists of several working groups, including: Non-Discriminatory Working Group Focus is on discrimination in the housing and finance markets Members include DOJ, HUD, CFPB, NCUA, prudential regulators (OCC, FDIC and Federal Reserve) and others Stated goal is to strongly enforce fair lending laws collaboratively Concerted efforts to strongly enforce federal fair lending laws are expected to continue among DOJ, HUD, CFPB, NCUA and prudential regulators 18

19 DOJ: Fair Lending Priorities 19 Fair lending enforcement is a stated priority of U.S. Attorney General Eric Holder In 2008, DOJ began aggressively enforcing fair lending laws Established Fair Lending Enforcement Unit within its Civil Rights Division in 2010 Active DOJ fair lending matters in various areas for mortgage lending: Discretionary pricing Redlining Reverse redlining Steering of minority borrowers to less favorable loans Marital status/gender/age lending discrimination DOJ is also looking at auto lending, credit cards, student loans and unsecured consumer lending

20 DOJ: Fair Lending Priorities (cont.) Collaboration with other agencies in investigations and enforcement actions Increase in regulatory referrals regarding fair lending issues Prudential regulators have been employing disparate impact in their examinations and have referred pattern or practice matters to DOJ using the disparate impact theory Since 2010, DOJ has filed or resolved over 30 fair lending matters and has numerous fair lending investigations pending 20

21 HUD: Emphasis on Fair Lending HUD also aggressively enforcing fair lending laws Key areas of focus Maternity discrimination Disability discrimination Active investigations; some joint with DOJ and CFPB Final rule on disparate impact standards (February 2013) Final rule on sexual orientation or gender identity (Feb. 2012) Adds to FHA prohibited bases Prohibits discrimination based on sexual orientation or gender identity 21

22 CFPB: Fair Warning on Fair Lending CFPB has jurisdiction over financial institutions with $10 billion and above in assets and non-depository institutions Supervises largest banks and credit unions Enforcement of fair lending laws occurs through CFPB s Office of Supervision and Enforcement and Office of Fair Lending & Equal Opportunity CFPB roles and responsibilities include: Oversight and enforcement of ECOA and HMDA Conducting fair lending examinations Coordination of state/federal fair lending enforcement efforts Note: HUD continues to enforce FHA 22

23 CFPB: Fair Warning on Fair Lending (cont.) Under ECOA, CFPB must refer any pattern or practice of discrimination or criminal conduct to DOJ The Dodd-Frank Act of 2010 granted CFPB authority to conduct investigations and bring administrative enforcement proceedings or civil actions CFPB is conducting joint fair lending investigations with DOJ and HUD CFPB has entered into MOUs and/or Joint Statement of Principles with DOJ, HUD, prudential regulators, and the National Association of Attorneys General for coordinated information gathering, review, and enforcement 23

24 CFPB: Fair Warning on Fair Lending (cont.) 24 First indication CFPB would strongly enforce fair lending laws: CFPB Bulletin , Lending Discrimination, April 18, 2012 Fair Notice on Fair Lending (Patrice Ficklin s blog, April 18, 2012) CFPB Related fair lending guidance Bulletin , Indirect Auto Lending and Compliance with the Equal Credit Opportunity Act (March 21, 2013) Bulletin , Home Mortgage Disclosure Act (HMDA) and Regulation C Compliance Management; HMDA Resubmission Schedule and Guidelines; and HMDA Enforcement (Oct. 9, 2013) Fair Lending Report (2012) Required by Dodd-Frank Act; provides overview of Bureau s fair lending supervision program and describes accomplishments CFPB Supervisory Highlights reports Two of three issued to date have focused on fair lending risks (mortgage servicing and adverse action notices)

25 CFPB: Fair Warning on Fair Lending (cont.) Areas of CFPB fair lending focus 2013: Practices The 4 D s, which highlight Bureau s concern with fair lending and UDAAP compliance Deceptive and misleading marketing of consumer financial products/services Debt traps Dead ends Discrimination 2014: Products Mortgage origination and servicing Auto finance Credit cards Student loan servicing Access to credit generally 25

26 CFPB: Fair Lending Examinations Fair lending is a component of every CFPB examination Types of fair lending exams ECOA baseline review ECOA targeted review HMDA review Bureau has its own set of examination procedures, but also temporarily adopt[s] Interagency Fair Lending Examination Procedures Risk-based prioritization process. Factors include: Fair lending complaints Public/private litigation Information from prior fair lending exams or enforcement actions Adequacy and quality of fair lending CMS Program Data analyses Institution-specific and horizontal Insights, information & research (CFPB Markets group) 26

27 CFPB: Fair Lending Examinations (cont). 27 Changes to CFPB s examination process during 2013 Enforcement attorneys no longer part of on-site exam team Announced Oct. 9, 2013 Will continue to closely coordinate with examiners off-site Roll-up exams in progress; examination teams transferring to other institutions Responsible Conduct Guidelines Supervision/pre-enforcement Exam focus is both process- and product-oriented Compliance Management Systems ( CMS ) Board and management oversight Adequacy of written policies and procedures Complaint management Vendor management Products (Risk-Focused)

28 CFPB: HMDA Revisited In September 2013, CFPB launched new web-based tools that allow public to view, search and sort HMDA data Site offers user-friendly tools to enable public to try and identify specific lending activities and patterns CFPB announced two HMDA enforcement actions and Bulletin in October 2013 Enforcement actions against bank and nonbank resulted in penalties and corrective action arising from repeat issues with error rates that exceeded permissible thresholds and deficient HMDA compliance programs Bulletin announces new resubmission guidelines, provides guidance on compliance programs, and lists factors considered in enforcement actions Proposed HMDA rules required by Dodd-Frank Act expected in 2014 Will greatly expand current data collection and reporting requirements pursuant to Dodd Frank 28

29 NCUA: Fair Lending in Focus Renewed focus on fair lending by NCUA In 1999, NCUA adopted the FFIEC fair lending examination procedures In 2010, NCUA centralized the fair lending examination program in its Office of Consumer Protection ( OCP ) NCUA fair lending guidance issued last spring Fair Lending Examination Program (March 2013) NCUA Fair Lending Guide (March 2013) Fair Lending Compliance Best Practices overview (April 2013) Fair Lending Compliance FAQ (May 2013) NCUA is in the process of implementing guidance 29

30 NCUA: Fair Lending in Focus (cont.) NCUA selects federal credit unions for a fair lending exam or off-site supervision contact if they demonstrate higher fair lending risk based on: HMDA data outliers Fair lending violations General compliance risks Other factors Most federal credit unions are not selected for a NCUA fair lending examination If federal credit union demonstrates potential for fair lending risk but does not have HMDA outliers, it is subject to an off-site fair lending supervision contact 30

31 NCUA: Fair Lending in Focus (cont.) Fair lending supervision contact procedures Includes review of P&Ps, audit or verification assessments (or both), and compliance assessments HMDA LAR also reviewed OCP staff will communicate with credit union staff throughout each off-site supervision contact Once off-site supervision contact is completed, credit union will receive written and oral reports containing results, including recommendations 31

32 Recent Fair Lending Enforcement Actions 32

33 Current Enforcement Landscape Recent DOJ fair lending settlements have been largest in history Bank of America/Countrywide - $335 million Wells Fargo - $175 million Ally Bank and Ally Financial (joint with CFPB) - $98 million HUD has significantly increased its fair lending enforcement efforts (e.g., maternity/disability discrimination) CFPB is also focusing on fair lending enforcement activities include joint investigations with DOJ and HUD Fair lending allegations continue to focus on use of discretion and redlining (pricing, judgmental underwriting, etc.) New issues include REO property management and lenders being held liable for fair lending issues of acquired entities (Chevy Chase, National City) 33

34 Mortgage Fair Lending Enforcement Actions: Faster Pace and Higher Price Bank Agency Penalty / Restitution Mortgage Pricing Settlements Countrywide / B of A DOJ $335,000,000 Wells Fargo DOJ $175,000,000 National City Bank DOJ/CFPB $35,000,000 SunTrust Mortgage DOJ $21,000,000 Plaza Home Mortgage DOJ $3,000,000 Chevy Chase Bank DOJ $2,850,000 Southport Bank DOJ $687,000 Mortgage Access to Credit Settlements Citizens Republic Bancorp DOJ $3,625,000 Luther Burbank Savings DOJ $2,000,000 Midwest BankCentre DOJ $1,450,000 Community State Bank DOJ $165,000 34

35 Mortgage Fair Lending Enforcement Actions 35 Pricing discrimination by brokers and loan officers Continues to be focus of most enforcement actions and investigations Pricing disparities of 5-25 bps can result in referral to DOJ Redlining Active area of focus by prudential banking regulators with community banks At least one investigation by CFPB of mortgage lender without CRA obligations Maternity and disability discrimination Primarily a focus of HUD and DOJ Default servicing Fair servicing practices Loss mitigation and foreclosure REO property management NFHA report issued in 2012 sparked issue Wells Fargo entered into conciliation agreement with HUD and NFHA in 2013, agreeing to pay $42 million to settle claims that it did not maintain or market REO property in African-American and Latino neighborhoods to same level it did in white neighborhoods

36 Non-Mortgage Enforcement Actions: Both Pace and Price Accelerating Bank Agency Penalty / Restitution Indirect Auto Pricing Settlements Ally DOJ/CFPB $18,000,000/$80,000,000 Nara Bank DOJ $410,000 Unsecured Lending Settlements Texas Champion Bank DOJ $700,000 Nixon State Bank DOJ $100,000 36

37 Fair Lending Enforcement Developments: Non-Mortgage Lending Indirect auto lending Investigations of banks and captive auto lenders regarding dealer mark-up policies and practices Private student lending Fair lending investigations and DOJ referrals Personal lending Two recent DOJ settlements on unsecured personal loans 37

38 Indirect Auto Fair Lending Enforcement Actions U.S. Bank v. Ally Bank and Ally Financial; In the Matter of Ally Bank and Ally Financial (December 2013) On December 21, 2013, the CFPB and DOJ announced a settlement with Ally Bank and Ally Financial ( Ally ) concerning alleged discrimination in dealer mark-up Ally was required to provide $80 million in restitution to approximately 256,000 customers and pay a $18 million civil money penalty U.S. Bank and DFS also required by CFPB to: Cease from deceptive marketing and lending practices Stop requiring use of military allotments to participate in program Improve consumer disclosures for add-on products 38

39 Indirect Auto Fair Lending Enforcement Actions (cont.) In the Matter of U.S. Bank and In the Matter of Dealers Financial Services (June 2013) On June 27, 2013, CFPB announced a settlement with U.S. Bank and its non-bank partner, Dealers Financial Services ( DFS ), concerning alleged deceptive marketing and subprime auto loan financing practices targeted toward active-duty military U.S. Bank and DFS were required to refund approximately $6.5 million to 50,000 servicemembers for failing to properly disclose all fees charged to participants in the MILES auto loan program and misrepresenting true cost and coverage of add-on products U.S. Bank and DFS also required by CFPB to: Cease from deceptive marketing and lending practices Stop requiring use of military allotments to participate in program Improve consumer disclosures for add-on products 39

40 HMDA Enforcement Actions In the Matter of Mortgage Master, Inc. and In the Matter of Washington Federal (October 2013) Mortgage Master: Joint enforcement action by CFPB and the Commonwealth of Massachusetts Division of Banks requiring the institution to pay a civil money penalty of $425,000 Washington Federal: Enforcement action brought by the CFPB against a bank which was required to pay $34,000 in civil money penalties In both cases, the financial institutions were required to correct and resubmit 2011 HMDA data and develop an effective HMDA compliance management system to prevent future violations 40

41 Answers to Most Commonly Asked Fair Lending Questions 41

42 Common Fair Lending Questions Can a credit union match a loan rate for an individual member (versus offering the same rate to all members)? Can loan promotions be offered to one SEG group but not another? What are the fair lending implications for the new Ability to Repay/Qualified Mortgage rule? What are the best ways to manage fair lending risk in indirect auto lending? 42

43 Conclusion Lori J. Sommerfield Counsel (202)