Fair Lending THIS PUBLICATION IS Not offered as legal advice SO Readers should consult with legal counsel for advice on specific fact situations. Copyrighted by Compliance Resource, LLC, April 2017 No portion of it, other than any government forms it contains, can be reproduced without violating copyright laws.
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Sponsor and Presenters Sponsor Compliance Resource, LLC is a consulting firm for financial institutions that focuses on compliance with federal laws and regulations applicable to financial institutions. Its website, jackscomplianceresource.com, provides multiple resources to assist financial institutions in their efforts to comply with federal laws and regulations. Presenter Jack Holzknecht is the CEO of Compliance Resource, LLC. He has been delivering the word on lending compliance for 41 years. In 36 years as a trainer over 130,000 bankers (and many examiners) have participated in Jack s live seminars and webinars. Jack s career began in 1976 as a federal bank examiner. He later headed the product and education divisions of a regional consulting company. There he developed loan and deposit form systems and software. He also developed and presented training programs to bankers in 43 states. Jack has been an instructor at compliance schools presented by a number of state bankers associations. As a contractor he developed and delivered compliance training for the FDIC for ten years. He is a Certified Regulatory Compliance Manager and a member of the National Speakers Association.
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TABLE OF CONTENTS PROGRAM DESCRIPTION AND PURPOSE... 1 EQUAL CREDIT OPPORTUNITY ACT... 3 FAIR HOUSING ACT... 5 SCOTUS - DISPARATE IMPACT... 11 RECENT CASES... 14 RECENT DEVELOPMENTS... 58 PENDING DEVELOPMENTS... 71
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Program Description and Purpose Introduction Fair Lending never seems to fall out of fashion. While the rest of the industry is focusing on TRID, Flood Insurance and HMDA, the regulatory agencies, the Department of Justice and plaintiff attorneys are focused intently on the issue of fair lending. Large penalties and burdensome enforcement actions are the order of the day. In a recent speech, CFPB Director Richard Cordray confirmed that consent orders that accompany the Bureau s public enforcement actions, provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions. He added that it would be compliance malpractice for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly. Charges of discrimination can come from any direction and can be obvious, subtle or unintended. Risk comes in the form of penalties, regulatory enforcement actions, civil liability, or damage to a bank's reputation, to mention a few. The best defense to these threats and risks is developing and maintaining a sound fair lending compliance management system. Purpose This information packed seminar explains recent fair lending problems, the corrective action required by the agencies, the penalties imposed on the bank, and steps your institution can take to avoid similar problems. Pending developments that will have a significant impact on Fair Lending are explored. The program also provides a quick refresher on the basic concepts of fair lending and fair lending risk management. 2017 Compliance Resource, LLC 1
Program Description and Purpose Goals Upon completion of this program, participants understand: Basic fair lending concepts; o Laws and regulations; o Bases of discrimination; o Types of discrimination; Recent Developments o Regulation by enforcement review of consent orders; BancorpSouth Bank case Maternity cases o HUD Guidance on Limited English Proficiency o Fair Lending actions entered into by municipalities; Pending Developments o Expansion of Regulation B to include data collection on loans to minority-owned businesses, women-owned businesses, and small businesses; and o How the new HMDA rule will impact fair lending. 2017 Compliance Resource, LLC 2
Equal Credit Opportunity Act Law The Equal Credit Opportunity Act (title VII of the Consumer Credit Protection Act) (15 USC 1601) became law in 1974. Regulation The Federal Reserve Board s (FRB) implementing regulation is Regulation B (12 CFR 202). The regulation took effect in 1975. Commentary The FRB s Official Staff Commentary includes interpretations of and additional information about the regulation. Good faith compliance with the commentary affords protection from civil liability. Purpose The regulation is to require creditors to: Promote the availability of credit to all creditworthy applicants without regard to any prohibited basis; Notify applicants of action taken on their applications; Report credit history in the names of both spouses on an account; Retain records of credit applications; Collect information about the race and other personal characteristics in applications for certain dwelling related loans; and Provide applicants with copies of appraisal reports used in connection with credit transactions. Discrimination 1002.4(a) A creditor shall not discriminate against an applicant on a prohibited basis regarding any aspect of a credit transaction. 2017 Compliance Resource, LLC 3
ECOA General Rules Definition- Prohibited Basis 1002.2(z) The term means: Race; Color; Religion; National origin; Sex; Marital status; Age (provided that the applicant has the capacity to enter into a binding contract); The fact that all or part of the applicant s income derives from any public assistance program; or The fact that the applicant has in good faith exercised any right under the Consumer Credit Protection Act. 2017 Compliance Resource, LLC 4
Fair Housing Act Law The Fair Housing Act (FHA) is part of the Civil Rights Act of 1968. The Fair Housing Amendments Act of 1988 amended the original Act. Regulations AGENCY REGULATION Consumer Financial Protection Bureau 12 CFR 1002 Federal Deposit Insurance Corporation 12 CFR 338 Office of the Comptroller of the Currency 12 CFR 27 National Credit Union Administration 12 CFR 701 Department of Housing and Urban Development (HUD) 24 CFR 110 Purpose The purpose of the law and the regulations is to prohibit discrimination in housing-related lending activities based on: Race Color Religion National Origin Sex Handicap Familial Status 2017 Compliance Resource, LLC 5
Fair Lending Essentials ECOA - Overview The Equal Credit Opportunity Act (ECOA) prohibits discrimination in any aspect of a credit transaction. It applies to any extension of credit, including extensions of credit to small businesses, corporations, partnerships, and trusts. Note: The CFPB's Regulation B implements the ECOA. Regulation B describes lending acts and practices that are specifically prohibited, permitted, or required. FHA - Overview The Fair Housing Act (FH Act) prohibits discrimination in all aspects of "residential real-estate related transactions," including but not limited to: Making loans to buy, build, repair or improve a dwelling Purchasing real estate loans Selling, brokering, or appraising residential real estate Selling or renting a dwelling. Bases of Discrimination FHA - 1968 ECOA 1974 Race Race Color Color Religion Religion National Origin National Origin Sex Sex FHAA - 1988 Marital Status Familial Status Age Handicap Receipt of public assistance income Good faith exercise of any right granted under the Consumer Credit Protection Act Note: Because both the FH Act and the ECOA apply to mortgage lending, lenders may not discriminate in mortgage lending based on any of the prohibited factors in either list. 2017 Compliance Resource, LLC 6
Fair Lending Essentials Protected Parties 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 neighborhood or other area where the property to be financed is located. Prohibited Acts Under the ECOA, it is unlawful for a lender to discriminate on a prohibited basis in any aspect of a credit transaction. Under both the ECOA and the FH Act, it is unlawful for a lender to discriminate on a prohibited basis in a residential real-estaterelated transaction. Under one or both of these laws, a lender may not, because of a prohibited factor: 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; 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; or Use different standards for pooling or packaging a loan in the secondary market. 2017 Compliance Resource, LLC 7
Fair Lending Essentials Types of Discrimination The courts have recognized three methods of proof of lending discrimination under the ECOA and the FH Act: Overt evidence of disparate treatment Comparative evidence of disparate treatment Evidence of disparate impact. Disparate Treatment The existence of illegal disparate treatment may be established either by statements revealing that a lender explicitly considered prohibited factors (overt evidence) or by differences in treatment that are not fully explained by legitimate nondiscriminatory factors (comparative evidence). Overt Evidence of Disparate Treatment There is overt evidence of discrimination when a lender: Openly discriminates on a prohibited basis. Expresses - but does not act on a discriminatory preference Example: A lender offers a credit card with a limit of up to $750 for applicants aged 21-30 and $1500 for applicants over 30. Example: A lending officer tells a customer, We do not like to make home mortgages to Native Americans, but the law says we cannot discriminate and we have to comply with the law. Note: The second example violates the FH Act prohibition on statements expressing a discriminatory preference and the Regulation B prohibition on discouraging applicants on a prohibited basis. 2017 Compliance Resource, LLC 8
Fair Lending Essentials Comparative Evidence of Disparate Treatment Disparate treatment occurs when a lender treats a credit applicant differently based on one of the prohibited bases. It does not require any showing that the treatment was motivated by prejudice or a conscious intention to discriminate against a person beyond the difference in treatment itself. It is considered by courts to be intentional discrimination because no credible, nondiscriminatory reason explains the difference in treatment on a prohibited basis. Note: If a lender has apparently treated similar applicants differently on the basis of a prohibited factor, it must provide an explanation for the difference in treatment. If the lender s explanation is found to be not credible, the agency may find that the lender intentionally discriminated. Marginal Applicants Disparate treatment may more likely occur in the treatment of applicants who are neither clearly well qualified nor clearly unqualified. Discrimination may more readily affect applicants in this middle group for two reasons. First, if the applications are close cases, there is more room and need for lender discretion. Second, whether or not an applicant qualifies may depend on the level of assistance the lender provides the applicant in completing an application. The lender may, for example, propose solutions to credit or other problems regarding an application, identify compensating factors, and provide encouragement to the applicant. Lenders are not obligated to provide assistance, but to the extent that they do, the assistance must be provided in a nondiscriminatory way. 2017 Compliance Resource, LLC 9
Fair Lending Essentials Comparative Evidence of Disparate Treatment - Example A nonminority couple applied for an automobile loan. The lender found adverse information in the couple s credit report. The lender discussed the credit report with them and determined that the adverse information, a judgment against the couple, was incorrect since the judgment had been vacated. The nonminority couple was granted their loan. A minority couple applied for a similar loan with the same lender. Upon discovering adverse information in the minority couple s credit report, the lender denied the loan application on the basis of the adverse information without giving the couple an opportunity to discuss the report. The foregoing is an example of disparate treatment of similarly situated applicants, apparently based on a prohibited factor, in the amount of assistance and information the lender provided. Redlining Redlining is a form of illegal disparate treatment in which a lender provides unequal access to credit, or unequal terms of credit, because of the race, color, national origin, or other prohibited characteristic(s) of the residents of the area in which the credit seeker resides or will reside or in which the residential property to be mortgaged is located. Redlining may violate both the FH Act and the ECOA. Disparate Impact - Overview 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, the policy or practice is described as having a disparate impact. Disparate Impact - Example A lender s policy is not to extend loans for single-family residences for less than $60,000. This 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. 2017 Compliance Resource, LLC 10
SCOTUS - Disparate Impact The Case On June 25, 2015, the United States Supreme Court upheld the use of the disparate impact theory in fair housing cases in a 5-4 decision in the case of Texas Department of Housing & Community Affairs v. Inclusive Community Project, Inc. et al. The decision is a victory for the bank regulatory agencies and others that use the disparate impact theory in fair lending matters. The Issue Bank regulatory agencies have used the disparate impact theory to establish racial discrimination liability for years. The theory is controversial because a party can be found liable of discrimination without having any intent to discriminate or without having knowledge that its actions or practices could be viewed as discriminatory. For example, setting a minimum loan amount has been claimed by government agencies in some instances to create a disparate impact. While the policy is neutral on its face, it has the potential to disproportionately impact those with lower incomes, resulting in fewer loans to minorities. Burden Shifting Approach The Court s opinion reaffirms the use of a burden-shifting approach to proving disparate impact liability. 1. The plaintiff first bears the burden of proving its prima facie case that a practice results in, or would predictably result in, a discriminatory effect on the basis of a protected characteristic. 2. If the charging party or plaintiff proves a prima facie case, the burden of proof shifts to the bank or defendant to prove that the challenged practice is necessary to achieve one or more of its substantial, legitimate, nondiscriminatory interests. 3. If the the bank or defendant satisfies this burden, then the plaintiff may still establish liability by proving that the substantial, legitimate, nondiscriminatory interest could be served by a practice that has a less discriminatory effect. 2017 Compliance Resource, LLC 11
SCOTUS - Disparate Impact Other Issues - Statistics The Court held that disparate impact liability cannot be based solely on a showing of a statistical disparity, and noted that such a claim must fail if the plaintiff cannot point to a defendant s policy or policies causing that disparity. Other Issues - Cause and Effect The Court further noted the importance of a robust causality requirement to protect defendants from being liable for racial disparities they did not create, seeking to avoid having the disparate impact theory applied in a way that will lead to use of numerical quotas regarding race, noting this application would cause serious Constitutional concerns. In his dissenting opinion, Justice Thomas stated that we should not automatically presume that any institution with a neutral practice that happens to produce a racial disparity is guilty of discrimination until proved innocent. He provides real world examples of the problems this would create, including pointing to the absurdity of the notion that the National Basketball Association is racist because seventy percent of its players are African American. 2017 Compliance Resource, LLC 12
SCOTUS - Disparate Impact Proactive Steps Issues in recent cases have included discretionary pricing policies, subjective criteria in loan approval processes, minimum loan amounts, and geographical type grading systems. To minimize the risk of disparate impact challenges lenders should: Review existing policies and adopt policies and procedures to minimize the chance for statistical disparities in lending practices, especially any policies in which subjective factors are utilized. Consider if policies might adversely affect a potential class. To the extent institutions allow for discretion or exceptions from these policies or procedures, they should require documentation of specific, nondiscriminatory justification for such exception. Be aware that strategic decisions, such as deciding to enter or exit a particular market segment or geographic area, may have a direct influence on potential disparate impact claims because of unforeseen statistical consequences of these decisions. When making these types of decisions, institutions should ensure that business justifications are sufficiently analyzed and well documented. Ensure that internal and external auditing functions are in place to minimize the risk of statistical disparities giving rise to discrimination claims, even when the institution follows its policies, procedures, and documents decisions appropriately. 2017 Compliance Resource, LLC 13
Recent Cases Regulation by Enforcement The CFPB has been criticized for providing guidance in the form of enforcement actions rather by writing regulations. Expect more of the same. Compliance Malpractice In a March 9, 2016 speech Director Cordray confirmed that consent orders that accompany the Bureau s public enforcement actions, provide detailed guidance for compliance officers across the marketplace about how they should regard similar practices at their own institutions. If the same problems exist in their day-to-day operations, they should look closely at their processes and clean up whatever is not being handled appropriately. He added that it would be compliance malpractice for executives not to take careful bearings from the contents of these orders about how to comply with the law and treat consumers fairly. 2017 Compliance Resource, LLC 14
Recent Cases - Luther Burbank Savings Luther Burbank Savings In September 2012, the DOJ filed a complaint alleging that Luther Burbank Savings had engaged in a discriminatory practice by implementing and maintaining a $400,000 minimum loan amount for its wholesale single family residential lending programs in Los Angeles beginning in 2006 which had a disparate impact on African-Americans and Hispanics as compared to other prime lenders. Although Luther disagreed with the allegations and contended that its practices comported with the letter and spirit of the ECOA and the FHA and that any disparities were attributable to legitimate non-discriminatory factors, in October 2012 it entered into an agreement with the DOJ to resolve the claims, including a commitment not to include the $400,000 minimum amount as part of its program. 2017 Compliance Resource, LLC 15
Recent Cases - American Honda American Honda In July 2015, the CFPB settled an action against American Honda Finance Corporation under the ECOA based in part on disparate impact liability. The action related to Honda s practice of granting dealers the discretion to charge up to 225 basis points higher to borrowers. While neither Honda nor the dealers recorded the borrowers race, the CFPB and the DOJ alleged that African-American borrowers were shown to pay a statistically significant higher rate than white borrowers (according to the CFPB s nationality and race probabilities as determined by a formula based on borrower geography and surnames. See Bayesian Improved Surname Geocoding Model). The CFPB did not seek civil money penalties from Honda, instead imposing a restitution payment and agreeing to a mandated reduction in certain fees charged by Honda. 2017 Compliance Resource, LLC 16
Recent Cases - Fifth Third Bank Issue On September 28, 2015 the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) entered into a consent decree with Fifth Third Bank for auto-lending discrimination. The CFPB and DOJ s joint investigation concluded that Fifth Third s policies: Resulted in minority borrowers paying higher dealer markups: Fifth Third violated the Equal Credit Opportunity Act by charging African-American and Hispanic borrowers higher dealer markups for their auto loans than non- Hispanic white borrowers. These markups were without regard to the creditworthiness of the borrowers. Injured thousands of minority borrowers: Fifth Third s illegal discriminatory pricing and compensation structure meant thousands of minority borrowers from January 2010 through September 2015 were charged, on average, over $200 more for their auto loans. 2017 Compliance Resource, LLC 17
Recent Cases - Fifth Third Bank Fifth-Third Bank - Action Under the CFPB and DOJ's orders, Fifth Third must: Substantially reduce or eliminate entirely dealer discretion: Fifth Third will reduce dealer discretion to mark up the interest rate to only 1.25 percent above the buy rate for auto loans with terms of 5 years or less, and 1 percent for auto loans with longer terms. Fifth Third also has the option under the order to move to non-discretionary dealer compensation. Pay $18 million in damages for consumer harm: o Fifth Third will pay $12 million into a settlement fund that will go to harmed African-American and Hispanic borrowers whose auto loans were financed by Fifth Third between January 2010 and September 2015. o Based on a determination by the DOJ and the CFPB, Fifth Third will receive credit of between $5 million and $6 million for remediation it has already provided to harmed consumers whose auto loans were financed by Fifth Third from January 2010 through June 2015. o Fifth Third will then pay any additional funds necessary into the settlement fund to bring its total payment to harmed consumers to $18 million. Pay to hire a settlement administrator to distribute funds to victims. Remedial Action - Dealer Compensation Policy The bank is required to implement a dealer compensation policy conforming with one of the three options detailed below. If a non-objection of the Fair Lending Director and DOJ is required in a chosen option, the bank shall submit the policy for non-objection within thirty (30) days of the Effective Date. The bank shall implement the chosen option within the later of: (a) 120 days after the Effective Date, or (b) 30 days of obtaining any required non-objection. The bank shall not implement any revised dealer compensation policy until obtaining all non-objections of the Fair Lending Director and the DOJ required by the chosen option. 2017 Compliance Resource, LLC 18
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option One - Limit Discretion a. The bank: Will limit Dealer Discretion in setting the contract rate to: o 125 basis points for retail installment contracts with terms of sixty (60) months or less, and o 100 basis points for retail installment contracts with terms greater than sixty (60) months. Is not precluded from including in its compensation policies an additional nondiscretionary component of dealer compensation consistent with applicable laws and subject to the non-objection of the Fair Lending Director and the DOJ. The bank may provide entirely nondiscretionary dealer compensation to some dealers (consistent with subparagraph h of Option Three, described below) while it provides discretionary compensation to other dealers consistent with Option One, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems. Remedial Action - Dealer Compensation Policy - Option One - Compliance Management System b. The bank will maintain general compliance management systems reasonably designed to assure compliance with all relevant federal consumer financial laws, including the ECOA. With respect to monitoring Dealer Discretion for compliance with the ECOA, The bank must, at a minimum: i. Send annual notices to all dealers explaining the ECOA, stating the bank s expectation with respect to ECOA compliance, and articulating the dealer s obligation to price retail installment contracts in a non-discriminatory manner. ii. Monitor for compliance with Dealer Discretion limits. Remedial Action - Dealer Compensation Policy - Option One - Reporting c. The bank shall submit data on its indirect auto lending portfolio to the Fair Lending Director and the DOJ, at their request, semiannually for analysis and monitoring. 2017 Compliance Resource, LLC 19
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option Two - Limit Discretion d. The bank Will limit Dealer Discretion in setting the contract rate to: o 125 basis points for retail installment contracts with terms of 60 months or less, and o 100 basis points for retail installment contracts with terms greater than 60 months. Is not precluded from including in its compensation policies an additional nondiscretionary component of dealer compensation consistent with applicable laws and subject to the non-objection of the Fair Lending Director and the DOJ. May provide entirely nondiscretionary dealer compensation to some dealers (consistent with subparagraph h of Option Three, described below) while it provides discretionary compensation to other dealers consistent with Option Two, so long as all loans purchased from a particular dealer are compensated using only one of the two compensation systems. 2017 Compliance Resource, LLC 20
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option Two - Limit Discretion - Standard Dealer Participation Rate i. The bank shall establish a pre-set rate of dealer participation (i.e., additional interest above the riskbased buy rate) that the bank will require dealers to include in all credit offers that the dealer extends to customers ( Standard Dealer Participation Rate ), such that: A. The Standard Dealer Participation Rate cannot exceed one hundred and twenty-five (125) basis points for retail installment contracts with terms of sixty (60) months or less, and one hundred (100) basis points for retail installment contracts with terms greater than sixty (60) months. B. The bank may allow dealers to include a single, set lower dealer participation rate than the Standard Dealer Participation Rate for particular loan types and/or channels or for all loans purchased from a particular dealership. C. The bank may allow dealers to include a lower dealer participation rate than the Standard Dealer Participation Rate based on a lawful exception pursuant to the fair lending policies and procedures as set forth below, and subject to the dealer s agreement to abide by the policies and maintain required documentation. 2017 Compliance Resource, LLC 21
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option Two - Limit Discretion - Standard Dealer Participation Rate - Exceptions ii. To the extent the bank allows exceptions to the Standard Dealer Participation Rate, to ensure consistency with the requirements of the ECOA, The bank shall establish policies and procedures for those exceptions subject to the non-objection of the Fair Lending Director and the DOJ. The Bureau and the DOJ recommend that the policies and procedures for such exceptions include the following elements: A. Granting Exceptions: Policies and procedures that specifically define the circumstances when the bank allows downward departures from the Standard Dealer Participation Rate. B. Documenting Exceptions: Policies and procedures that require on a loan-by-loan basis, documentation appropriate for each specific exception that is, at a minimum, sufficient to effectively monitor compliance with the exceptions policies. Such documentation should be sufficient not only to explain the basis for granting any exception to the Standard Dealer Participation Rate, but also to provide details and/or documentation of the particular circumstances of the exception. C. Record Retention: Policies and procedures for documentation retention requirements that, at a minimum, comply with the requirements of Regulation B. 2017 Compliance Resource, LLC 22
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option Two - Compliance Management System - Monitor Rate e. The bank will develop and maintain a compliance management system to monitor dealer compliance with setting contracts at the Standard Dealer Participation Rate and any exceptions thereto to ensure they comply with the conditions for exceptions to the Standard Dealer Participation Rate. This will include: i. Training dealers on the bank s exceptions policies and procedures; ii. Regular monitoring of dealers exceptions to the Standard Dealer Participation Rate, including documentation of those exceptions; iii. Periodic audits for compliance with all policies and procedures relevant to granting exceptions to the Standard Dealer Participation Rate and to test for and identify fair lending risk; and iv. Appropriate corrective action for a dealer s noncompliance with the bank s exceptions policies and procedures, culminating in the restriction or elimination of dealers ability to exercise discretion in setting a consumer s contract rate or exclusion of dealers from future transactions with the bank. Remedial Action - Dealer Compensation Policy - Option Two - Compliance Management System - General Compliance f. The bank will maintain general compliance management systems reasonably designed to assure compliance with all relevant federal consumer financial laws, including the ECOA. With respect to monitoring Dealer Discretion for compliance with the ECOA, the bank, in addition to the monitoring set forth in paragraph (e)(iv) above, must, at a minimum: i. Send annual notices to all dealers explaining the ECOA, stating the bank s expectation with respect to ECOA compliance, and articulating the dealer s obligation to price retail installment contracts in a non-discriminatory manner. ii. Monitor for compliance with Dealer Discretion limits. 2017 Compliance Resource, LLC 23
Recent Cases - Fifth Third Bank Remedial Action - Dealer Compensation Policy - Option Two - Data Submission Remedial Action - Dealer Compensation Policy - Option Three - No Discretion Remedial Action - Dealer Compensation Policy - Option Three - Compliance Management Systems g. The bank shall submit data on its indirect auto lending portfolio to the Fair Lending Director and the DOJ, at their request, semiannually for analysis and monitoring. h. The bank will maintain policies that do not allow dealers any discretion to set the contract rate subject to the nonobjection of the Fair Lending Director and the DOJ. i. The bank will maintain general compliance management systems reasonably designed to assure compliance with all relevant federal consumer financial laws, including the ECOA. This will include the bank sending annual notices to all dealers explaining the ECOA, stating the bank s expectation with respect to ECOA compliance, and articulating the dealer s obligation to price retail installment contracts in a non-discriminatory manner. Remedial Action - Dealer Compensation Policy - Option Three - Compliance Management Systems - Clarification j. The bank will not have to: Review or remunerate for prohibited basis disparities in dealer markup resulting from Dealer Discretion in setting the contract rate, because there is no such discretion. Maintain a compliance management system to monitor dealer exceptions because dealers do not have such discretion. 2017 Compliance Resource, LLC 24
Recent Cases - Hudson City Savings Bank Overview On November 4, 2015 the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) entered into a joint action against Hudson City Savings Bank (Paramus, NJ) for discriminatory redlining practices that denied residents in majority-black-and-hispanic neighborhoods fair access to mortgage loans. Issue The joint action alleges that Hudson City illegally avoided and thereby discouraged consumers in majority-black-and- Hispanic neighborhoods from applying for credit by: Avoiding locating branches and loan officers in majority- Black-and-Hispanic communities Avoiding using mortgage brokers in majority-black-and- Hispanic communities Excluding majority-black-and-hispanic communities from its marketing strategy Excluding majority-black-and-hispanic neighborhoods from its credit assessment areas Summary of Action The consent order, requires Hudson City to take remedial measures to provide access to credit to the Black and Hispanic neighborhoods that it allegedly redlined. Specifically, the order requires Hudson City to: Pay $25 million to a loan subsidy program Spend $1,000,000 on targeted advertising and outreach Spend $750,000 on local partnerships Spend $500,000 on consumer education Offer full-service banking in majority-black-and-hispanic communities Expand assessment areas to include majority-black-and- Hispanic communities Assess the credit needs of majority-black-and-hispanic communities Develop a fair lending compliance and training plan Pay a $5.5 million penalty to the CFPB Civil Penalty Fund 2017 Compliance Resource, LLC 25
Recent Cases - Hudson City Savings Bank Fair Lending Compliance - CMS Consultant Paragraph 2 Within 60 days of the Effective Date, Defendant must identify an independent third-party compliancemanagement-system consultant ( CMS Consultant ), subject to Plaintiffs Non-objection, to assist in the review and revision as necessary of Defendant s compliance management system with respect to redlining. Within 20 days of the Non-objection to the selection of the CMS Consultant, Defendant must enter into a contract with the CMS Consultant, subject to Plaintiffs Non-objection, requiring the CMS Consultant to conduct a detailed assessment of Defendant s redlining compliance management system, including at a minimum o Defendant s assessment area under the Community Reinvestment Act ( CRA Assessment Area ); o Geographic restrictions on loan products; o Branch locations; o Loan officer locations; o Product availability at branch locations; o Broker selection and monitoring; and o Marketing. The CMS Consultant will also be required to make recommendations of steps Defendant should take to ensure that Defendant does not engage in unlawful redlining in violation of the ECOA or the FHA. Fair Lending Compliance - CMS Report Paragraph 3 Within 90 days of notification of Plaintiffs Non-objection to Defendant s contract with the CMS Consultant, Defendant must submit to Plaintiffs a detailed written report by the CMS Consultant describing the Defendant s fair lending compliance management system, weaknesses in the system, and recommendations to strengthen the system to ensure that Defendant complies with ECOA and the FHA with respect to redlining prohibitions. 2017 Compliance Resource, LLC 26
Recent Cases - Hudson City Savings Bank Fair Lending Compliance - Compliance Plan Paragraph 4 Unless otherwise specified in Paragraph 57, within 60 days of Defendant s submission of the CMS Consultant s written report pursuant to Paragraph 3 Defendant will submit a written compliance plan ( Compliance Plan ) to Plaintiffs, subject to Non-objection by Plaintiffs, implementation of which will ensure that Defendant complies with ECOA and the FHA with respect to redlining prohibitions in the Affected MSAs. The Compliance Plan will include, at least: (a) Steps to effectively and promptly revise all of Defendant s mortgage lending policies and practices that pose redlining risks including at a minimum risk that may arise from branch or loan officer location; mortgage loan product availability at branches; CRA assessment area delineations; broker selection and monitoring; geographic restrictions on loan products; and marketing including those risks identified by the CMS Consultant; (b) Adoption of a written policy and procedures regarding Defendant s selection and oversight of its mortgage brokers to address redlining risk, including policies and procedures for monitoring the activities of mortgage brokers and loan officers regarding the solicitation and origination of loans in majority-black-and-hispanic neighborhoods; (c) Fair lending training as set forth in Paragraph 6 below; and (d) A formal process for ongoing statistical monitoring for redlining risk, including statistical peer analysis of applications and originations from majority-black and- Hispanic neighborhoods and census tracts with relatively high concentrations of Black and Hispanic residents. Fair Lending Compliance - Fair Lending Officer Paragraph 5 Within 120 days of the Effective Date, Defendant will hire or designate a dedicated Fair Lending Officer who will report directly to Defendant s Chief Compliance Officer and whose primary responsibilities will include ensuring Defendant s compliance with its fair lending obligations in the Affected MSAs, implementing the Compliance Plan, and ensuring compliance with this Order. 2017 Compliance Resource, LLC 27
Recent Cases - Hudson City Savings Bank Fair Lending Training Paragraph 6 Within 180 days of the Effective Date, Defendant will provide training to all Covered Employees to ensure that their activities are conducted in a nondiscriminatory manner. o This training will address Defendant s obligations under the ECOA and FHA and Defendant s responsibilities under this Order, and may be conducted by webinar or interactive web-based training programs. o The training must require employees to verify participation and demonstrate proficiency. Defendant will provide this fair lending training annually to Covered Employees. Defendant may retain an independent qualified third-party to conduct the training. In addition to the training for Covered Employees described in this Paragraph, Defendant s senior management who participate in Defendant s lending, branching, broker network, or marketing in the Affected MSAs, and Defendant s Board of Directors will receive specialized training targeted to their oversight function that will include at a minimum training on implicit racial bias, conduct that could constitute redlining, and how to detect, prevent, and remedy redlining. The selection of any independent qualified third-party and the proposed training curriculum will be subject to the Nonobjection of Plaintiffs. Fair Lending Compliance and Training Paragraph 7 Fair Lending Training Paragraph 8 Defendant will bear all costs associated with the training. Within 15 days of the Effective Date, Defendant will provide to all Covered Employees, members of senior management identified in Paragraph 6, and members of the Board of Directors an explanation and copies of this Order and the Complaint in this matter, and allow an opportunity for such employees and members to have any questions concerning this Order and the Complaint answered. 2017 Compliance Resource, LLC 28
Recent Cases - Hudson City Savings Bank Fair Lending Training Paragraph 9 Defendant will secure from each individual referenced in Paragraph 6 a signed statement acknowledging that s/he has received a copy of this Order and the Complaint, and has completed the fair lending training. o These statements will be substantially in the form of Appendix A (Acknowledgment) and Appendix B (Fair Lending Training). Defendant will provide each individual who becomes a Covered Employee, member of senior management identified in Paragraph 6, or director: o A copy of this Order and the Complaint, provide an opportunity to have any questions answered, and secure a signed acknowledgement no later than 10 business days after the individual becomes a Covered Employee, member of senior management, or director. o The training referenced in Paragraph 6 and secure a signed acknowledgment within 60 days of their hire. Credit Needs Assessment - CNA Consultant Paragraph 13 Within 60 days of the Effective Date, Defendant will propose an independent third-party credit-needs-assessment consultant ( CNA Consultant ) to begin an assessment of the credit needs of majority-black-and-hispanic neighborhoods within the Affected MSAs. The selection of the CNA Consultant will be subject to Non-objection by Plaintiffs. 2017 Compliance Resource, LLC 29
Recent Cases - Hudson City Savings Bank Credit Needs Assessment - CNA Content Paragraph 13 This credit needs assessment will include: (a) an analysis of the most recent available demographic and socioeconomic data about the majority-black-and-hispanic neighborhoods; (b) an evaluation (to include market research and interviews) of the credit needs of, and corresponding lending opportunities in, these neighborhoods, including, but not limited to, the need for and feasibility of alternative mortgage and other credit products; (c) in-person marketing visits with brokers and correspondents to discuss product offerings, competition, and the viability of obtaining more applications from majority-black-and- Hispanic areas; (d) consideration of how Defendant s lending operations can be expanded to serve the remedial goals of this Order; (e) a thorough review of the availability and feasibility of relevant federal, state, and local governmental programs; and an evaluation of how participation in each of them would assist in achieving the remedial goals of this Order; and (f) meetings with representatives of community organizations significantly involved in promoting fair lending, home ownership, or residential development in affected majority- Black-and-Hispanic neighborhoods. Credit Needs Assessment - Written Report Paragraph 14 Unless otherwise specified in Paragraph 57, within 90 days of Plaintiffs Non objection to the CNA Consultant, Defendant will submit to Plaintiffs a written report by the CNA Consultant ( CNA Report ) of this credit needs assessment containing recommendations that address how each requirement of this Order set forth in Paragraphs 17-43 should be carried out to best achieve the remedial goals of this Order. 2017 Compliance Resource, LLC 30
Recent Cases - Hudson City Savings Bank Credit Needs Assessment - Remedial Plan Paragraph 15 Within 60 days of the submission of the CNA Report, Defendant will submit to Plaintiffs a Remedial Plan that details, in light of the recommendations made by the CNA Consultant, the actions Defendant proposes to take to comply with the requirements in Paragraphs 17-43 of this Order to best achieve the remedial goals of this Order and specific timeframes and deadlines for implementation of these actions. As specified below, the proposals within the Remedial Plan will be subject to Plaintiffs Non-objection. Credit Needs Assessment and Remedial Plan - Director of Community Lending Paragraph 16 Within 120 days of the Effective Date, Defendant will hire or designate a fulltime Director of Community Lending. For the duration of this Order, the Director of Community Lending will have primary responsibility for: o Overseeing the continued development of Defendant s lending in majority-black-and-hispanic neighborhoods within the Affected MSAs consistent with the action steps contained in the Remedial Plan; o Coordinating Defendant s involvement in community lending initiatives and outreach programs within the Affected MSAs; o Serving as a resource to lending staff to encourage and develop more lending within majority Black-and- Hispanic neighborhoods within the Affected MSAs; promoting financial education and counseling within the Affected MSAs; and o Building relationships with community groups within the Affected MSAs. The Director of Community Lending will be a member of management and will report directly to the Board. Hudson City Savings Bank - Update On September 30, 2015 the Federal Reserve Board announced approval of the application by Manufacturers and Traders Trust Company, Buffalo, to merge with Hudson City Savings Bank, Paramus, and retain and operate branches at the locations of Hudson City Savings Bank's main office and branches. 2017 Compliance Resource, LLC 31
Recent Cases - BancorpSouth Bank Overview On June 29, 2016, the Consumer Financial Protection Bureau (CFPB) and the Department of Justice (DOJ) announced a joint action against BancorpSouth Bank (BSB) for discriminatory mortgage lending practices that harmed African Americans and other minorities. Issue The complaint filed by the CFPB and DOJ alleges that BSB: Engaged in unlawful redlining by acting to meet the credit needs of majority-white neighborhoods in the Memphis TN-MS-AR Metropolitan Statistical Area ("Memphis MSA" or "MSA") while avoiding the credit needs of majority-minority neighborhoods, thereby engaging in acts or practices directed at prospective applicants that discouraged people in minority neighborhoods from applying for credit. BSB generates more mortgage loan applications in the Memphis MSA than any other MSA in which it operates. Discriminated against African-American applicants in its underwriting of mortgage loans, including loans that the BSB classified as for a consumer purpose and loans that the BSB classified as for a business purpose, by rejecting their applications at significantly higher rates than similarly situated non-hispanic White ("White") applicants. Discriminated against African-American borrowers in the pricing of rnortgage loans, including consumer-purpose and business-purpose transactions, by charging them, on average, 30-64 basis points more for first lien and second lien mortgage loans than similarly situated White borrowers Implemented a policy and practice that required its employees to treat applicants for mortgage loans differently based on the applicant's race or other prohibited characteristic. Specifically, BSB instructed its loan officers to deny applications from minorities and other "protected class members" more quickly than other applicants and not to provide credit assistance to "borderline" applicants that other applicants may have received that might have improved their chances of being approved for the loan. 2017 Compliance Resource, LLC 32
Recent Cases - Bancorp South Bank Use of Testers A series of matched-pair tests at several BSB branches further demonstrate BSB's discrimination against African Americans. The tests revealed that BSB treated African-American testers less favorably than similarly situated White testers. Smoking Gun An audio recording of an internal meeting at BSB in or around September 2012 clearly articulates the BSB's policy or practice to reject minority applicants more quickly than White applicants, as well as the BSB's perception of African Americans. The meeting participants were all White and included at least one BSB manager, loan officers, and loan processors. At the meeting, a BSB manager instructed loan officers and processors under her supervision that mortgage applications from minorities and others whom BSB viewed as "protected class" members must be "turned down" in 21 days and that "borderline" customers should be turned down quickly, while applications from White applicants were not subject to this shorter review period. The BSB generally permitted loan officers to assist marginal applicants; the explicitly race-based denial policy depai1ed from that practice. When asked for an explanation for the explicitly race-based denial policy, the manager stated, "I think it's lawsuits, it's lawsuits, and we just dodged a really large bullet." According to the BSB manager, a minority applicant whose application had been delayed had previously threatened to sue BSB, and the BSB was concerned about similar lawsuits from other minorities. Later in the meeting, a loan officer asked the manager whether loan officers should help marginally qualified applicants improve their credit scores so their applications would be approved. The manager cautioned against doing so stating that "you are gonna spend two weeks trying to get it re-scored and get that credit score up and by that time they're mad and sending you mean letters." 2017 Compliance Resource, LLC 33
Recent Cases - Bancorp South Bank Smoking Gun, continued The audio recording also documented BSB employees making derisive comments about minorities following the manager's articulation of the race-based denial policy. In discussing the explicitly race-based denial policy, a loan officer commented that "they need to get their credit up" and "stop paying their damn bills late" and then laughed. In response to a loan officer noting that all of the meeting participants were White, the manager stated "I'm sure I'll hear about that soon, too. I'm looking. I don't know where I'll put one, but I'm looking." In discussing the BSB's hiring of an African-American employee, a loan processor cautioned, "don' t use the n-word." A few moments later, a BSB employee quipped "what's up, niggas!" Both of these comments were followed by laughter in the room. 2017 Compliance Resource, LLC 34
Recent Cases - Bancorp South Bank Summary of Action The consent order, which is subject to court approval, requires BSB to take a number of remedial measures. Among other things, the order requires BSB to: Pay $4 million to a loan subsidy program. Pay $2.78 million to African-American consumers harmed by discrimination. Spend at least $300,000 on targeted advertising and outreach. Spend $500,000 on local partnerships. Expand its physical presence by opening one new branch or loan production office in a high-minority neighborhood in Memphis. This is in addition to a branch that BSB recently opened in a majority-minority neighborhood in Memphis. Extend credit offers to African-American consumers who were denied mortgage loans while BSB's allegedly discriminatory underwriting policy was in place the opportunity to apply for a new loan at a subsidized interest rate. Implement revisions to its policies that require its employees to provide equal levels of information and assistance to individuals who inquire about mortgage loans, regardless of race or any other prohibited characteristic. Pay a $3 million penalty. 2017 Compliance Resource, LLC 35
Recent Cases - Bancorp South Bank Recent Efforts Prior to issuance of the Consent Decree, BSB took a number of steps to improve its compliance management system, reduce its fair lending risk, and increase its lending in minority areas. These steps include: 1. Implementing rate sheets to price loans originated by its Community Banking Department; 2. Transitioning to centralized underwriting in its Community Banking Department; 3. Appointing a Chief Fair Lending Officer with responsibility over the Bank's fair lending compliance program; 4. Appointing a Community Development Lending Manager with responsibility over meeting the needs of homebuyers in low-to-moderate income and minority communities, and hiring 16 community development mortgage specialists; 5. Opening a full-service branch in a majority-minority neighborhood in the Memphis MSA; 6. Providing financial literacy training in the Memphis MSA; 7. Implementing enhanced fair lending training; 8. Introducing a low down-payment credit product; 9. Monitoring pricing and underwriting outcomes on a quarterly basis; and 10. Hiring a new Chief Executive Officer, President, General Counsel, Mortgage Department President, and Chief Banking Officer and Director of Community Lending. Requirements - CMS Consultant Under the terms of the Consent Decree BSB must hire a CMS Consultant to conduct a detailed assessment of Defendant's fair lending compliance management system relating to Mortgage Lending. The Consultant must prepare a detailed written report describing BSB's fair lending compliance management system, weaknesses in the system, and recommendations to strengthen it to ensure that BSB does not engage in discrimination in violation of the ECOA or the FHA. 2017 Compliance Resource, LLC 36
Recent Cases - Bancorp South Bank Requirements - CMS Plan Under the terms of the Consent Decree BSB must submit a written compliance plan ("CMS Plan") based on the CMS Consultant's written report. The CMS Plan must include, at a minimum: a. Steps to effectively and promptly review and revise BSB current Mortgage Lending policies and practices to ensure compliance with the ECOA and the FHA; b. Adoption or revision of diversity policies and practices; c. Implementation or revision of fair lending training; d. Adoption or revision of written policies and procedures regarding the provision of information and assistance to individuals who apply for mortgage credit or inquire about the possibility of applying for mortgage credit. A primary purpose of these policies and procedures will be to ensure that BSB provides equal information and assistance regardless of race or other prohibited characteristics; e. Adoption or revision of a formal process for ongoing monitoring of BSB' s Mortgage Lending for compliance with the ECOA and the FHA and for taking appropriate corrective action when necessary, including but not limited to the statistical analyses described below; f. Implementation or revision of regular audits of BSB's Mortgage Lending, to occur at least annually, internally by BSB' s audit department or by an independent party, to assess compliance with the ECOA and the FHA. BSB must provide the written findings of these audits to Plaintiffs as part of the Annual Reports; and g. Implementation or revision of a consumer complaint resolution program to address consumer complaints alleging discrimination in Mortgage Lending. BSB must provide to Plaintiffs documentation from this complaint resolution program, including documentation of any individual complaints alleging discrimination and any resolution, as part of the Annual Reports. 2017 Compliance Resource, LLC 37
Recent Cases - Bancorp South Bank Training BSB has provided fair lending training on an annual basis to all lending personnel, including senior management. BSB will hire an independent, qualified third party to provide the required fair lending training to all Covered Employees to ensure that their activities are conducted in a nondiscriminatory manner. This training will address at a minimum Defendant's obligations under the ECOA and FHA, the subject of implicit racial bias, and Defendant's responsibilities under the Order. BSB's senior management, as defined from time to time by BSB's Board, and BSB's Board will receive specialized training targeted to their oversight function on conduct that could constitute redlining, underwriting discrimination, or pricing discrimination, and how to detect, prevent, and remedy such discrimination. o During the training, the BSB will provide to each participant a copy of this Order. o The training must require participants to verify participation and demonstrate proficiency. o The training may be provided either electronically or inperson. Pricing and Underwriting Compliance Plan BSB must submit a plan setting forth the actions BSB has already taken and plans to take to comply with Paragraphs 13-42 of this Order ("Pricing and Underwriting Compliance Plan"). The Pricing and Underwriting Compliance Plan must include, at a minimum: a. The Community Banking Department pricing and underwriting policies and procedures and monitoring programs required by Paragraphs 13, 17 and 18; b. Proposed methodologies for the semi-annual analyses required by Paragraphs 14 and 19; c. Proposed plans for remuneration of affected consumers and additional corrective action if statistically significant disparities are found, as required by Paragraphs 15 and 20; and d. A proposed plan for offering credit to denied African- American applicants, as required by Paragraphs 37 and 39. 2017 Compliance Resource, LLC 38
Recent Cases - Bancorp South Bank Pricing Policies and Monitoring BSB will implement policies and procedures for the pricing of all Mortgage Loans to natural persons originated by its Community Banking Department. Pricing Policies and Monitoring - Rate Sheets BSB will utilize rate sheets to price all Mortgage Loans to natural persons originated by its Community Banking Department that exclusively base pricing on objective credit and borrower characteristics supported by a legitimate business need. BSB must maintain a policy that describes its use of rate sheets. The policy must contain requirements to retain a copy of the rate sheet in effect at the time the Mortgage Loan price was set and a list of the borrower and loan characteristics relied on in setting the loan price. To the extent BSB makes exceptions to these rate sheets, BSB must maintain policies and procedures that: (1) specifically define the circumstances when BSB allows exceptions; (2) require documentation appropriate for each exception that is sufficient to effectively monitor compliance with the exception policies and procedures, including providing the basis for granting the exception and details and/or documentation of the particular circumstances supporting the use of the exception; and (3) require document retention that, at a minimum, complies with the requirements of Regulation B. 2017 Compliance Resource, LLC 39
Recent Cases - Bancorp South Bank Pricing Policies and Monitoring - Statistical Analysis BSB must conduct semi-annual portfolio-wide statistical analysis of the note rates of Mortgage Loans to natural persons originated by its Community Banking Department for disparities based on, at a minimum, race. The controls in this regression analysis will be limited to the factors considered in pricing loans set forth in BSB's rate sheets, unless Plaintiffs Non-object to the use of additional controls. If any statistical analysis discloses statistically significant disparities in the pricing of Mortgage Loans from natural persons in its Community Banking Department on the basis of race, BSB will within 45 days of the analysis: (a) remunerate affected consumers using a method subject to Plaintiffs' Non-objection; and (b) take additional corrective action, such as proposing steps to modify its pricing policies and procedures as necessary to prevent such disparities going forward, subject to Nonobjection by Plaintiffs, and education, discipline, or termination of employee(s), as deemed appropriate. Underwriting Policies and Monitoring BSB must maintain specific race neutral underwriting guidelines, policies, and procedures for Mortgage Loans to natural persons originated by its Community Banking Department that are designed to ensure consistent application of legitimate underwriting criteria and avoid unlawful discrimination. To the extent BSB makes exceptions to these guidelines, BSB must maintain policies and procedures that: (1) specifically define the circumstances when BSB allows exceptions; (2) require documentation appropriate for each exception that is sufficient to effectively monitor compliance with the exceptions policies, including providing the basis for granting the exception and details and/or documentation of the particular circumstances supporting the use of the exception; and (3) require document retention that, at a minimum, complies with the requirements of Regulation B. 2017 Compliance Resource, LLC 40
Recent Cases - Bancorp South Bank Second Reviews BSB has implemented a program of controls and monitoring for compliance with its Community Banking Department underwriting policies and procedures, including but not limited to its current practice of second reviews of all Mortgage Loan application denials. The program shall be modified as necessary to ensure that any loan that satisfies the BSB's underwriting criteria and is otherwise in compliance with the BSB's underwriting policies and procedures will be funded, and that any loan that is not in compliance with the policies and procedures will not be funded. Underwriting - Statistical Analysis BSB must conduct a semi-annual analysis of the underwriting of Mortgage Loan applications from natural persons in its Community Banking Department for disparities based on, at a minimum, race. The controls in this regression analysis will be limited to the legitimate and consistently applied underwriting criteria described in BSB's underwriting guidelines, unless Plaintiffs Non-object to the use of additional controls. If any analysis required by Paragraph 19 discloses statistically significant disparities in the underwriting of Mortgage Loan applications to natural persons in the Community Banking Department based on race, BSB must within 45 days of the analysis: (a) remunerate affected consumers using a method subject to Plaintiffs ' Non-objection; and (b) take additional corrective action, such as proposing steps to modify its underwriting policies and procedures as necessary to prevent such disparities going forward, subject to Non-objection by Plaintiffs; and education, discipline, or tem1ination of employee(s), as deemed appropriate. 2017 Compliance Resource, LLC 41
Recent Cases - Bancorp South Bank Settlement Administrator BSB must execute a contract with the a Settlement Administrator ("Administrator") to conduct the activities set forth in the following paragraphs. The Administrator's contract must require the Administrator to: Comply with the provisions of this Order as applicable to it; Work cooperatively with Plaintiffs in the conduct of its activities, including reporting regularly to and providing all reasonably requested information to Plaintiffs. Comply with all confidentiality and privacy restrictions applicable to the party who supplies information and data to it. Settlement Fund BSB must deposit in an interest-bearing escrow account $2,776,890 for the purpose of providing redress to Affected Consumers for harm they may have suffered as a result of BSB's alleged pricing and underwriting discrimination ("Settlement Fund 2017 Compliance Resource, LLC 42
Recent Cases - Bancorp South Bank Credit Offers BSB must extend to each Denied Applicant an offer to apply for a Mortgage Loan product of the Denied Applicant's choosing under BSB's underwriting guidelines required by Paragraph 17 of this Order with the following: (a) an interest rate that is the lower of the interest rate available at the time the initial application was denied or the current interest rate less 100 basis points; or (b) the subsidies identified in Paragraph 57(a), (b), (c), and (e) in an amount that is comparable to the value of the difference between the current interest rate and the interest rate reduction required in subparagraph (a) ("credit offer"). BSB's correspondence with Denied Applicants will include the minimum objective underwriting criteria for each Mortgage Loan product offered by BSB's Community Banking Department. BSB will pay and/or waive all required application costs and fees for applications that result from offers made pursuant to this Paragraph. Acceptance of the credit offer may not be conditioned on the waiver of any right. For all Denied Applicants who accept the offer to re-apply for credit and are denied by BSB, BSB must provide to Plaintiffs the specific reason(s) for the denial and, if requested by Plaintiffs, a copy of the loan application file. No provision of this Order requires BSB to make any unsafe or unsound loan or to make a loan to a person who is not qualified for the loan based upon lawful, nondiscriminatory terms; however, BSB may choose to apply more flexible underwriting standards in connection with these credit offers, so long as those standards comport with safe and sound lending practices. 2017 Compliance Resource, LLC 43
Recent Cases - Bancorp South Bank Community Reinvestment Act Assessment Area In January 2013, BSB amended its Community Reinvestment Act ("CRA") assessment area in the Memphis MSA to include all of Tipton, Shelby, Fayette, DeSoto, and Tate counties. BSB must continue to include all of these counties in its CRA assessment area during the term of this Order. BSB must not eliminate majority-minority neighborhoods from its CRA assessment area within the Memphis MSA throughout the term of this Order. Nothing in this Order precludes BSB from further expanding its CRA assessment area within the Memphis MSA in a manner consistent with the provisions of the CRA and its implementing regulations. BSB will ensure that all of its policies, publications, and marketing materials that refer to the geographic area in which it lends in the Memphis MSA describe an area no smaller than the assessment area described in Paragraph 43. 2017 Compliance Resource, LLC 44
Recent Cases - Bancorp South Bank Credit Needs Assessment and Redlining Remedial Plan BSB must propose an independent third-patty consultant ("CNA Consultant") to conduct an assessment of the Mortgage Loan needs in majority-minority neighborhoods within its CRA assessment area in the Memphis MSA. This credit needs assessment must include: (a) an analysis of the most recent available demographic and socioeconomic data about the majority-minority neighborhoods; (b) an evaluation of the Mortgage Loan needs of, and corresponding lending opportunities in, these neighborhoods, including but not limited to the need for and feasibility of alternative mortgage and other credit products; (c) consideration of how BSB's lending operations can be expanded to serve the remedial goals of providing increased Mortgage Lending in majority-minority neighborhoods in the Memphis MSA and promoting the revitalization and stabilization of the housing market in those neighborhoods; (d) a thorough review of the availability and feasibility of relevant federal, state, and local governmental programs and evaluation of how participation in each of them would assist in achieving the remedial goals of this Order; and (e) meetings with representatives of community organizations significantly involved in promoting fair lending, home ownership, or residential development in affected majorityminority neighborhoods. Redlining Remedial Plan BSB must submit a Redlining Remedial Plan. The Plan must: Specify, in light of the recommendation made by the CNA Consultant, the actions BSB proposes to take to comply with the requirements in Paragraphs 50-70 of this Order to best achieve the remedial goals of this Order. Specify timeframes and deadlines for implementation of these actions. 2017 Compliance Resource, LLC 45
Recent Cases - Bancorp South Bank Director of Community Lending BSB must hire or designate and retain a full-time Director of Community Lending. The Director of Community Lending must: Have primary responsibility for: o Overseeing the continued development of BSB's Mortgage Lending in majority-minority neighborhoods in the Memphis MSA consistent with the action steps contained in the Remedial Plan; o Coordinating BSB's involvement in community lending initiatives and outreach programs; o Serving as a resource to lending staff to encourage and develop more Mortgage Lending within majorityminority neighborhoods in the Memphis MSA; o Promoting financial education and counseling; and o Building relationships with community groups. Be a member of management and will report directly to the Board (or the Special Compliance Committee). 2017 Compliance Resource, LLC 46
Recent Cases - Bancorp South Bank Physical Expansion to Serve Minority Neighborhoods On November 16, 2015, BSB opened a full service branch in a majority-minority neighborhood in the Memphis MSA. Subject to any applicable approval of the appropriate regulator, BSB must: Open or acquire one additional branch or Mortgage Loan production office ("LPO") in the Memphis MSA. The branch or LPO must be in a retail-oriented space in a visible location accessible to concentrations of owner-occupied residential properties and located in a high-minority neighborhood. Propose a location of this branch or LPO based on the highminority neighborhoods that are in need of credit and, as applicable, banking services, and provide Plaintiffs with its rationale for choosing the particular location. Make all reasonable efforts to open the additional branch or LPO within 12 months of the Effective Date. The additional branch or LPO must provide, at a minimum, the full range of hours of operation typically offered at BSB' s branches. There must be at least one full-time Mortgage Department loan originator and one full-time Community Banking Department loan officer at the branch or LPO. Nothing in this Order precludes BSB from opening or acquiring additional branch offices or LPOs, and nothing contained in the report provided by the CNA Consultant would require BSB to open more than the one additional branch or LPO required by Paragraph 50. BSB must evaluate any future opportunities for expansion in the Memphis MSA not required by this Order, whether by acquisition or opening new offices, in a manner consistent with achieving the remedial goals of this Order and must notify Plaintiffs of any plans to open or acquire any new branches or other offices in the Memphis MSA during the term of this Order at the same time that it notifies its prudential regulator(s), so that Plaintiffs may raise any concerns with BSB and its prudential regulator(s) before regulatory approval is granted. 2017 Compliance Resource, LLC 47
Recent Cases - Bancorp South Bank Loan Subsidy Program BSB must invest $4,000,000 in a program to extend Mortgage Loans to Qualified Applicants in the Memphis MSA on a more affordable basis than BSB otherwise makes available to remedy its alleged redlining ("Loan Subsidy Program"). Loan Subsidy Program - Forms of Assistance The subsidies under the Loan Subsidy Program will be provided by the following means: a. originating a Mortgage Loan at an interest rate below BSB's otherwise prevailing interest rate; b. a direct grant for down payment assistance; c. a direct grant for closing cost assistance; d. payment of the initial mortgage insurance premium; and/or other means subject to advance Non-objection by Plaintiffs. Loan Subsidy Program - Forms of Assistance - Specifics BSB retains the discretion to offer more than one, or all, of the forms of financial assistance set forth in Paragraph 57 to Qualified Applicants on an individual basis as it deems appropriate under the factual circumstances of a particular application. BSB will exercise this discretion in a manner that enhances the likelihood that it will originate a loan to a Qualified Applicant consistent with applicable underwriting guidelines and safety and soundness standards, and will have discretion to provide the loan subsidy among its Mortgage Loan products. In no case will the combined forms of financial assistance set forth in Paragraph 57 exceed $7,250. The investment of BSB under the Loan Subsidy Program will consist of the cost to BSB of providing the subsidies to consumers described in Paragraph 57 and not the cost of implementation of the Loan Subsidy Program. 2017 Compliance Resource, LLC 48
Recent Cases - Bancorp South Bank Loan Subsidy Program - Underwriting No provision of this Order requires BSB to make any unsafe or unsound loan, or to make a loan to a person who is not qualified for the loan based upon lawful, nondiscriminatory terms; however, BSB may choose to apply more flexible underwriting standards in connection with the Loan Subsidy Program, so long as those standards comply with safe and sound lending practices. BSB's underwriting standards applied to properties in majority-minority neighborhoods in the Memphis MSA must be no less favorable than the standards that are applied in other neighborhoods. At the same time, no provision of this Order imposes an obligation on BSB to apply underwriting standards to applicants that qualify for the Loan Subsidy Program that are more favorable than the standards otherwise applied by BSB. Advertising and Outreach BSB must spend a minimum of $ 100,000 per year during the term of this Order on the targeted advertising and outreach campaign described in Paragraphs 64-65. The advertising and outreach campaign must consider the results of the credit needs assessment required in Paragraph 46, must advertise the Loan Subsidy Program, and must be targeted to generate applications for Mortgage Loans from qualified residents in majority-minority neighborhoods in the Memphis MSA. 2017 Compliance Resource, LLC 49
Recent Cases - Bancorp South Bank Advertising and Outreach - Components The campaign must include the following components: a. Direct mailings in majority-minority neighborhoods. These mailings must not be targeted exclusively or primarily at existing customers. b. At least two print media specifically directed to African- American readers. c. Radio advertisements on at least two radio stations whose programming is directed toward African-American listeners. d. Point-of-distribution materials, such as posters and brochures. BSB must place these promotional materials in its branch offices in and near majority-minority neighborhoods. e. All of BSB's direct mailings, print advertising and point-ofdistribution materials must contain an equal housing opportunity logo, slogan, or statement. All of BSB's radio advertisements must include the audible statement "Equal Opportunity Lender." Advertising and Outreach - Specifics BSB must: Conduct or sponsor at least four outreach programs per year to real estate brokers and agents, developers, and public or private entities engaged in mortgage-loan-related business in majority-minority neighborhoods in the Memphis MSA. o Through the programs, BSB must inform the attendees of its products and services, including the Loan Subsidy Program described in this Order, and otherwise develop business relationships with them. o BSB will offer these programs at locations reasonably convenient to the business operations of the attendees. Propose in the Redlining Remedial Plan how it will implement the requirements of Paragraphs 63-65. 2017 Compliance Resource, LLC 50
Recent Cases - Bancorp South Bank Community Development and Financial Education Partnership Program - History During 2015, BSB provided financial literacy training to more than 5,000 residents of the Memphis MSA. The agencies take no position regarding the effectiveness of BSB's training program or materials; the parties however do acknowledge that financially educated consumers are essential to the remedial goal of sustained increases in BSB's residential lending in majority-minority neighborhoods within the Memphis MSA. The parties also acknowledge that assisting residents of these neighborhoods in maintaining and improving their consumer credit ratings is essential to the remedial goals of this Order. Community Development and Financial Education Partnership Program - Partner BSB or its designee, as agreed to by BSB and the United States, must partner with one or more community-based organizations or governmental organizations that provide credit, financial education, homeownership counseling, credit repair, and/or foreclosure-prevention services to the residents of majority-minority neighborhoods in the Memphis MSA. BSB must consider organizations that will aid it in achieving the remedial goals of the Order; specifically, the partnerships should aid BancorpSouth in: o Establishing a physical presence in majority-minority neighborhoods; o Marketing its residential loan products in majorityminority neighborhoods; o Extending credit to qualified borrowers in majorityminority neighborhoods; o Providing credit counseling, credit establishment and credit repair services in majority-minority neighborhoods; o Providing financial education seminars; and o Assisting with the revitalization and stabilization of the housing market in majority-minority neighborhoods. BSB must spend a minimum of $500,000 on these partnerships during the term of this Order. 2017 Compliance Resource, LLC 51
Recent Cases - Bancorp South Bank Community Development and Financial Education Partnership Program - Implementation BSB must propose in the Redlining Remedial Plan how it will implement the requirements of Paragraph 68. BSB's proposal: Must include a thorough review of: o All relevant organizations; o A summary of meetings with these organizations; o An examination of any relevant federal, state, or local governmental programs that may assist BSB and the organization(s) in serving the affected areas; and o The basis for the selection of the proposed partner(s). Should also describe in detail how BSB or its designee, as agreed to by BSB and the United States, intends to implement the partnership(s) over the term of this Order. 70. Civil Money Penalty BSB must pay a civil money penalty of $3,030,756 to the Bureau. Role of the Board - Special Compliance Committee BSB's Board must establish a Special Compliance Committee of at least three members of the Board, no more than one of whom may be an officer or employee of BSB. The Special Compliance Committee will: Include the Director of Community Lending, who will report to the Board (or the Special Compliance Committee). Be responsible for monitoring and coordinating BSB's adherence to the provisions of this Order. Meet at least every other month and will maintain minutes of its meetings. Role of the Board - Review Duties The Board (or the Special Compliance Committee) must review all submissions (including plans, reports, programs, policies, and procedures) required by this Order prior to submission to Plaintiffs. 2017 Compliance Resource, LLC 52
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