Presented by: Martin (Marty) Mitchell, CRCM Managing Director, ProBank Austin Robert J. (Bob) Mullenbach, CRCM Managing Director, Compliance Division Deputy, ProBank Austin
Fair Lending Laws ECOA Prohibits discrimination in any aspect of a consumer credit transaction (including Small Businesses, Corporations, Partnerships, and Trusts) Fair Housing Prohibits discrimination in residential real-estate related transactions which include: Making loans to buy, build, repair or improve a dwelling; Purchasing real estate loans; Selling, brokering, or appraising residential real estate; and Selling or renting a dwelling. -2-
Regulation B Regulation B also requires lenders to do the following: Notify applicants of the credit decision within 30 days of receiving a completed application. Retain records of credit applications for 25 months after notifying the member of its credit decision. Collect information about the applicant's race and other personal characteristics in applications for certain dwelling-related loans. Provide applicants with copies of appraisal reports used in connection with credit transactions. Regulation B also prevents lenders from discouraging prospective applicants from making or pursuing an application. -3-
Applicability ECOA and Fair Housing cover all phases of the lending process: Applications; Loan closings; and Post loan closing including servicing and loss mitigation activities. ECOA and Fair Housing apply to financial institutions and any third parties engaged by financial institutions. -4-
Fair Lending Laws and Protected Classes Laws Description Protected Class Fair Housing Act (FHA) Makes discriminatio n illegal in connection with any housingrelated transaction Race, color, religion, handicap, familial status, national origin Applies To Loans that involve a dwelling; Transfers of loans that involve a dwelling; Selling, buying, renting, brokering or appraising a dwelling -5-
Fair Lending Laws and Protected Classes Laws Description Protected Class Applies To Equal Credit Opportunity Act (ECOA) Makes discrimination illegal in connection with credit or lending transaction Race, color, religion, sex, marital status, age, national origin, income from public assistance, exercise of rights under Consumer Credit Protection Act Every aspect of a any credit transaction -6-
Fair Lending Laws and Protected Classes Laws Description Data Points Applies To Home Mortgage Disclosure Act (HMDA) Requires reporting of residential lending data Race, ethnicity, sex, income, action taken, HOEPA, lien status, rate spread, property location Home purchase, home improvement, refinancing -7-
Prohibited Bases ECOA - Marital Status -Age -Public Assistance -Exercise of Rights under CCPA Fair Housing -Handicap -Familial Status ECOA and Fair Housing - Race or Color -Religion -National Origin -Sex -8-
Prohibited Acts Fail to provide information or services or provide different information or services regarding any aspect of the lending process, including credit availability, application procedures, or lending standards Discourage or selectively encourage applicants with respect to inquiries about or applications for credit Refuse to extend credit or use different standards in determining whether to extend credit or vary the terms of credit offered, including the amount, interest rate, duration, or type of loan Use different standards to evaluate collateral Treat a borrower differently in servicing a loan or invoking default remedies Use different standards for pooling or packaging a loan in the secondary market. -9-
Prohibited Acts A lender may not express, orally or in writing, a preference based on prohibited factors or indicate that it will treat applicants differently on a prohibited basis. A violation may still exist even if a lender treated applicants equally. A lender may not discriminate on a prohibited basis because of the characteristics of: An applicant, prospective applicant, or borrower A person associated with an applicant, prospective applicant, or borrower (for example, a co-applicant, spouse, business partner, or live-in aide) The present or prospective occupants of either the property to be financed or the characteristics of the neighborhood or other area where property to be financed is located. -10-
Persons With Disabilities The Fair Housing Act requires lenders to make reasonable accommodations for a person with disabilities when such accommodations are necessary to afford the person an equal opportunity to apply for credit. -11-
Applications Lenders are encouraged to use industry standard form applications. A lender choosing to use a non-standard credit application form should obtain a legal opinion stating the forms comply with the applicable legal requirements. The application may require any information, except for information about the applicant s: Spouse, unless the spouse will use or is contractually liable on the account or the applicant relies on the spouse s income Marital status when applying for unsecured credit when applying for secured credit, the application may use only the terms married, unmarried, or separated Sex, race, color, religion, and national origin * Childrearing or childbearing, such as birth control practices, intentions, or capability to bear children -12-
Examples of Overt Discrimination Including explicit prohibited basis identifiers in the institution s written or oral policies and procedures (underwriting criteria, pricing standards, etc.) Collecting information, conducting inquiries or imposing conditions contrary to express requirements of Regulation B. Including variables in a credit scoring system that constitute a basis or factor prohibited by Regulation B or, for residential loan scoring systems, the FHA. Statements made by the institution s officers, employees or agents which constitute an express or implicit indication that one or more such persons have engaged or do engage in discrimination on a prohibited basis in any aspect of a credit transaction. Employee or institutional statements that evidence attitudes based on prohibited basis prejudices or stereotypes. -13-
Three Types of Illegal Discrimination Disparate Treatment Occurs when a lender has neutral credit policies and criteria, but applies them inconsistently, in a way that adversely impacts borrowers on a prohibited basis. A bank requires automobile loan customers to have monthly debt payments of less than 40 percent of gross monthly income. If the bank denies a female applicant based on that rule, but makes a policy exception and approves a male applicant in similar circumstances, this may be disparate treatment. Lenders often have a legitimate, business-related reason to "bend the rules" for a particular applicant. If this is the case, it is possible that no violation of fair lending law occurred. -14-
Three Types of Illegal Discrimination Disparate Impact Occurs when a lender adopts a neutral policy, applies it consistently, but the policy causes a "disproportionate adverse impact" on a prohibited basis. A bank adopts a minimum loan amount for home mortgage loans. This minimum is so high that few minority, single or elderly applicants qualify for loans in the bank's market area due to their incomes or the local home values. This may constitute disparate impact. A policy or practice that creates a disparity on a prohibited basis is not necessarily proof of a violation. The apparent disparate impact may be legal if there is a business necessity for the policy or practice, and there is no alternative policy or practice that is less discriminatory. -15-
Prohibited Practices A lender may not discriminate on a prohibited basis by considering the characteristics of: An applicant, prospective applicant, or borrower; A person associated with an applicant, prospective applicant, or borrower; The present or prospective residents of the property to be financed; or The neighborhood where the property to be financed is located. -16-
How Discrimination Occurs in Underwriting Examiners compare credit-underwriting decisions to find apparent disparate treatment. A lender that approves a loan to a married applicant with a two-year-old bankruptcy, but denies applications from unmarried applicants with much older bankruptcies. Examiners focus their review on "marginal" applicants, who are neither clearly qualified, nor clearly unqualified, for credit. Lenders usually need to exercise judgment or provide extra assistance to qualify marginal applicants for credit, and discrimination may be more likely in these cases. -17-
Indicators of Discrimination in Underwriting Substantial disparities among the approval/denial rates for applicants by monitored prohibited basis characteristic (especially within income categories) Substantial disparities among the application processing times for applicants by monitored prohibited basis characteristic (especially within denial reason groups) Substantially higher proportion of withdrawn/ incomplete applications from prohibited basis group applicants than from other applicants Vague or unduly subjective underwriting criteria Lack of clear guidance on making exceptions to underwriting criteria, including credit scoring overrides -18-
Indicators of Discrimination in Underwriting Lack of clear loan file documentation regarding reasons for any exceptions to standard underwriting criteria, including credit scoring overrides Relatively high percentages of either exceptions to underwriting criteria or overrides of credit score cutoffs Loan officer or broker compensation based on loan volume (especially loans approved per period of time) Consumer complaints alleging discrimination in loan processing -19-
How Discrimination Occurs Terms and Conditions If a financial institution approves a loan but imposes higher interest rates or excessive fees on a prohibited basis, the financial institution may have violated the Equal Credit Opportunity Act (ECOA) or the Fair Housing Act (FHA). The examiner will need to investigate whether a nondiscriminatory reason, such as risk-based pricing, accounts for the difference. The Justice Department has settled several ECOA and FHA lawsuits with lenders, often citing discriminatory credit pricing. -20-
Indicators of Pricing Discrimination Financial incentives for loan officers or brokers to charge higher prices: interest rate, fees, points. Financial incentives are accompanied by broad pricing discretion such as through the use of overages or yield spread premiums. Presence of broad discretion in loan pricing (including interest rate, fees and points), such as through overages, underages or yield spread premiums. Such discretion may be present even when institutions provide rate sheets and fees schedules, if loan officers or brokers are permitted to deviate from those rates and fees without clear and objective criteria. -21-
Indicators of Pricing Discrimination Use of risk-based pricing that is not based on objective criteria or applied consistently Substantial disparities among prices being quoted or charged to applicants who differ as to their monitored prohibited basis characteristics Consumer complaints alleging discrimination in residential loan pricing. In mortgage pricing, disparities in the incidence or rate A loan program that contains only borrowers from a prohibited basis group, or has significant differences in the percentages of prohibited basis groups. -22-
Redlining General Concepts The avoidance of segments of the bank s market area in providing banking products and services. A complete absence of activity is not the standard disproportionately lower levels will raise concerns during reviews. Within the Context of the Bank s Defined Market Areas, examiners will look for: Lending Patterns Branch Structure Advertising Reverse Redlining high percentage of loans with less advantageous features in high minority areas -23-
Steering Steering is the placement of a customer in a product. NOTE: Steering can occur even if it doesn t involve a less favorable product. NOTE: May occur when the institution offers the same product in various lending channels that price or underwrite the product differently, i.e., portfolio vs. mortgage subsidiary products. -24-
How Discrimination Occurs Steering "Steering" generally occurs when a lender refers applicants to a less favorable credit product than they qualify for. May raise fair lending concerns if it puts prohibited-basis customers at a disadvantage. Lenders steer minority customers to FHA home mortgage loans even when they should qualify for lower-priced conventional credit. Examiners review the institution's policies and practices for referring customers to various products. If individual lenders can refer customers to different credit products, examiners evaluate whether the lenders use their discretion in a nondiscriminatory manner. -25-
ECOA Targeted Review Generally focus on a specific product; e.g. mortgages or auto lending. Statistical analysis File review -26-
Indirect Auto Lending Other than a home, a car or truck is often one of the largest purchases a consumer makes in his or her lifetime. Third largest market in terms of loans outstanding in the consumer financial marketplace, behind only mortgages and student loans. In 2013, outstanding auto loan balances were approximately $863 billion, with over $355 billion originated during 2013. Auto lenders fall under the CFPB s supervisory or enforcement jurisdiction. This includes financial institutions, like banks, credit unions, captive auto lenders, and certain nonbank companies. -27-
HMDA Data Integrity Review Essentially, HMDA compliance examination. Inaccurate HMDA data may lead to resubmission of HMDA data for one or more years. May also lead to fair lending enforcement action. -28-
Fair Lending Risk Assessment Program Procedures - Practices -29-
Fair Lending Risk Assessment Program: Clear written policies and procedures Management oversight Consistent with FFIEC Interagency Fair Lending Examination Procedures -30-
Board and Management Oversight Risk Assessment Oversight Know Your Products Know Your Data -31-
Fair Lending Compliance Program Policies and Procedures Monitoring Training Corrective Action -32-
Monitoring Compliance audits should include a process to: - Report findings to appropriate leadership and managers, - Respond to exceptions, - Implements corrective action, and monitors the results of corrective action. Self-evaluations and Self tests - Recommended for most banks as a way to review the results of lending activities to identify any risk indicators or areas of concern. -33-
Training Best practices include a formal fair lending training program, tailored to the institution that includes: - Board of Directors - New employees - Third-party providers - Programs specific to employee function - Applications, closings, foreclosures and debt resolution - Marketing, advertising and signage -34-
Common Violations Making loans with different pricing and terms to similarly situated applicants with no apparent explanation Failing to establish/update/comply with board-approved underwriting and pricing standards Lack of centralized underwriting/local decision-making authority with inadequate oversight No secondary review process Overt or misstatements in lending policies Redlining Steering -35-
Common Violations HMDA violations that can lead to a targeted fair lending exam: Failure to collect government monitoring information (GMI) Requesting information about the applicant s spouse when not applying for joint credit Failure to include alimony, child support, public assistance, and other separate maintenance when calculating applicant income Data errors ECOA/ Reg B - failure to provide adverse action notices in a timely manner -36-
Conclusion Equal treatment of loan applicants is a serious issue for the regulators and should be a serious issue for all lending institutions. Significant liability can be incurred through unintentional illegal discrimination. Multicultural awareness, race, gender, and handicap sensitivity training is not a joke and institutions that expect to survive and thrive should takes proactive steps to make this part of their corporate culture and identity. The tone at the top is crucial to success. -37-
Martin (Marty) Mitchell, CRCM Managing Director, ProBank Austin 6200 Dutchmans Lane, Suite 305 Louisville, Kentucky 40205 (800) 523-4778, Ext. 258 mmitchell@probank.com www.probank.com Robert J. (Bob) Mullenbach, CRCM Managing Director, Compliance Division Deputy, ProBank Austin 6200 Dutchmans Lane, Suite 250 Louisville, Kentucky 40205 (800) 523-4778, Ext. 258 mmitchell@probank.com www.probank.com